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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended October 31, 2001 Commission File Number 0-19019
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PRIMEDEX HEALTH SYSTEMS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New York 13-3326724
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1516 Cotner Avenue
Los Angeles, California 90025
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (310) 478-7808
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. ______
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $36,984,000 on January 25,
2002 based on the closing price for the common stock in the over-the-counter
bulletin board bulletin board market on said date.
The number of shares of the registrant's common stock outstanding on January 25,
2002 was 40,739,860 shares (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits are incorporated herein by reference as set forth in Item
14(b), Exhibits, in Part IV.
1
PART I
ITEM 1. BUSINESS
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BACKGROUND
Primedex Health Systems, Inc. ["PHS" or the "Company"] is a New York
corporation organized in 1985 with its executive offices located at 1516 Cotner
Avenue, Los Angeles, California 90025 where its telephone number is
310-478-7808.
Through its 48 California diagnostic imaging facilities (six of which
are wholly-owned by the Company's 91% owned Diagnostic Imaging Services, Inc.
["DIS"] subsidiary and two in partnership with unaffiliated parties), the
Company operates a network of centers through its RadNet Management, Inc.
subsidiary which arranges for the non-medical aspects of medical imaging
offering MRI, CT, PET, ultrasound, mammography, nuclear medicine and general
diagnostic radiology to the public.
CENTER MANAGEMENT
The Company's wholly-owned subsidiary, RadNet Management, Inc.
["RadNet"], manages the Company's network of 48 medical imaging centers. 40 of
the imaging centers are located in Southern California [with three centers
located in Beverly Hills and known as the Tower Imaging Division] with the
remaining eight centers located in northern California. At all the centers,
except two, the Company provides the imaging center facilities and equipment as
well as all non-medical operational, management, financial and administrative
services. At the two partnership centers, RadNet performs non-medical management
services. At all centers, the medical services and medical supervision are
provided by various independent physicians and physician groups [at most of the
centers, the medical services are provided by Beverly Radiology Medical Group
["BRMG"] [see "Item 13"]. As compensation for its management and other services
at the various centers, RadNet receives a management fee. In connection with the
imaging centers in which it is a partner, RadNet, in addition to a management
fee, also shares in the entity's net income.
DIAGNOSTIC IMAGING
The following are the principle medical diagnostic procedures performed
on patients at the various imaging centers owned or managed by the Company. The
patient is normally referred to the center for such diagnostic procedures by his
or her treating physician who may be independent or may be affiliated with an
Independent Physician Association ["IPA"], a Health Maintenance Organization
["HMO"], a Preferred Provider Organization ["PPO"], or a similar organization
which has contracted for such services. See "Marketing" herein. Not all of such
procedures are performed at each center.
DIAGNOSTIC RADIOLOGY OR X-RAY- X-ray employing x-ray radiation on two
planes; including fluoroscopy and endoscopy. X-ray is the most common energy
source used in imaging the body and is utilized in the following modalities (i)
conventional x-ray typically used to image bones and contrast enhanced
vasculature and organs; (ii) CT scanners utilize computers to produce
cross-sectional images of particular organs or areas of the body; and (iii)
digital x-ray systems add computer image processing capability to conventional
x-ray systems.
COMPUTED AXIAL TOMOGRAPHY [CT] - CT is 100 times more sensitive than
conventional x-ray. It is used to view inside any of the body's organs,
including the brain, to detect abnormalities and disease. CT focuses an x-ray on
a specific plane of the body, processes the image by computer, and constructs a
picture on a monitor, and later on film. Tissues of various density appear as
different shades of gray, bone [the most dense] as white, and air and fluid is
black. The procedure is painless and takes between 15 minutes and 45 minutes per
study; more than one study is often ordered on each patient. The patient simply
lies on a special, monitored table which is guided into the scanner. Some CT
studies involve the use of an injected contrast agent to better visualize
anatomy and pathology. Although it is very unusual, some patients may develop a
significant reaction to the contrast and in rare cases fatalities have resulted.
To determine patients most likely to have an adverse reaction all patients are
required to answer a questionnaire. Additionally, the Company primarily uses
non-ionic CT contrast agents to minimize contrast reactions. A CT system costs
in the range of $500,000 to $1,000,000, depending upon the specific performance
characteristics of the system.
2
MAGNETIC RESONANCE IMAGING [MRI] - Diagnostic imaging based on
magnetism rather than radiation or conventional x-ray. MRI has become widely
accepted as the standard diagnostic tool for a wide and fast-growing variety of
clinical applications for soft tissue anatomy (as found in the brain, spinal
cord and interior ligaments of body joints such as the knee). MRI takes between
20 to 45 minutes per examination and is painless, requiring only that the
patient lie still on a motorized table that slides into a long cylinder. On some
MRI studies, an injected contrast agent is used, and some require the use of
special "coils," permitting highly accurate scanning of a particular part of the
body. MRI systems cost between $900,000 and $2,000,000 each, depending upon the
system configuration, magnet design and field strength. There are no presently
known hazards to the general population in connection with normal use of MRI
(although the scanning of pregnant women is only done under limited
circumstances and patients with cardiac pacemakers or ferrous clips used in
surgical procedures are generally excluded from MRI procedures as well as the
area surrounding the MRI).
OPEN MRI - Technological advances in software and equipment technology
for MRI systems have allowed open design equipment to offer significantly
improved image quality. Most open MRI systems use permanent electromagnetic
technology, which substantially lowers both sitting and service costs, but does
not provide images as efficiently as high-field MRI systems. Recently, reliable
high-field open MRI systems have also become available. The open design allows
for studies not normally possible in conventional MRI systems, including exams
of infants, pediatric patients, claustrophobic patients, large or obese patients
and patients suffering from post-traumatic stress syndrome. Open MRI is also
capable of conducting musculoskeletal exams that require the patient to move or
flex, such as kinematic knee studies. A typical open MRI non-kinematic exam
takes from 45 to 90 minutes. Open MRI systems are priced in the range of
$600,000 to $1,500,000 each.
POSITION EMISSION TOMOGRAPHY (PET). PET scanning involves the
administration of a radiopharmaceutical agent with a positron-emitting isotope
and the measurement for the distribution of that isotope to create images for
diagnostic purposes. PET scans provide the capability to determine how metabolic
activity impacts other aspects of physiology in the disease process by
correlating the reading for the PET study with other studies such as CT or MRI.
PET technology has been found highly effective and appropriate in certain
clinical circumstances for the detection and assessment of tumors throughout the
body, the evaluation of certain cardiac conditions and the assessment of
epilepsy seizure sites. The information provided by PET technology often
obviates the need to perform further highly invasive and/or diagnostic surgical
procedures. Interest in PET scanning has increased recently due to several
factors including: expansion of available hardware options through the
introduction of dual head gamma camera coincidence detection; increased payor
coverage and reimbursement; the availability of the isotopes without an in-house
cyclotron; and a growing recognition by clinicians that PET is a powerful
diagnostic tool that can be used to evaluate and guide management of a patient's
disease. PET systems are priced in the range of $1,000,000 to $2,000,000 each.
Distribution networks have been established across the United States to ensure
consistent availability of and access to the isotopes.
MAMMOGRAPHY - Provides an x-ray picture of the breast, and is used to
detect tumors and cysts, and to help differentiate between benign and malignant
tumors.
NUCLEAR MEDICINE - Involves the use of a small amount of radioactive
material and is used to obtain information about the anatomy and functioning of
various organs. Nuclear medicine is based on the principle that organs absorb or
concentrate scientific minerals or hormones. These substances are not visualized
on conventional x-ray, but if they are made radioactive by the addition of a
radioisotope, they can be seen. If an organ is not functioning properly, too
little or too much of the substance will be taken up or concentrated in some
parts of the organ, but not other parts. The organ will thus appear different on
a screen. The amount of radiation is extremely low, and the isotope usually
disappears from the body within a day or less.
3
ULTRASOUND - A painless imaging technique that uses sound waves and
their echoes to visualize and locate internal organs. It is particularly useful
in viewing soft tissues that do not x-ray well. Ultrasound is used in pregnancy
to avoid x-ray exposure as well as in gynecological, urologic, vascular, cardiac
and breast applications.
BUSINESS STRATEGY
The Company believes a consolidation in the diagnostic imaging
industry is occurring and is necessary in order to provide surviving companies
the opportunity to achieve operating and administrative efficiencies through
consolidation. The Company's strategy is to further develop and expand its
California regional diagnostic imaging network emphasizing quality of care,
producing cost-effective diagnostic information and providing superior service
and convenience to its customers. The strategy of the Company is focused on the
following components: (i) to further participate in the consolidation occurring
in the diagnostic imaging industry by continuing to build its market presence in
its existing regional diagnostic imaging networks through geographically
disciplined acquisitions; (ii) to continue to market current diagnostic imaging
applications through its existing facilities to optimize and increase overall
procedure volume; and (iii) to strengthen and improve its marketing to managed
care customers on a regional basis. Additionally, the Company will consider
developing or acquiring additional regional networks outside California in
strategic locations where the Company can offer a broad range of services to
customers and realize increased economies of scale utilizing the management
programs developed in California.
RECENT IMAGING CENTER ACQUISITIONS / OPENINGS
On or about May 1, 2001, the Company acquired Modesto Imaging Center, a
large multi-modality imaging center, for $7,357,000 and assumption of certain
equipment leases having a remaining balance of $529,000. The Company financed
the purchase utilizing its existing financial resources, mainly DVI Financial
Services.
On or about June 1, 2001, the Company purchased a portion of the assets
of existing imaging centers located in Palm Springs and Palm Desert, California.
The purchase price was approximately $407,000 consisting of cash and assumption
of certain liabilities. After the acquisition the Company built a new center in
Palm Springs and opened three satellite facilities in the same geographic area
providing x-ray services. The Company financed the new location utilizing its
existing financing resources, mainly General Electric Company and DVI Financial
Services.
In December 2001, the Company opened a new multimodality center in
Burbank, California in partnership with an unrelated party. The Company utilized
its existing financing resources, mainly General Electric Company and DVI
Financial Services.
In early January 2002, the Company opened a second center in Tarzana
offering PET, CT and Open MRI. The Company utilized its existing financing
resources, mainly General Electric Company and DVI Financial Services.
In November 2001, the Company entered into a lease for a new facility
to be located in Rancho Bernardo, California. The Company will own 75% of the
facility with the radiologists providing services at the center owning the
remaining 25%. The center will offer MRI, CT, PET, mammography, ultrasound and
x-ray services. The Company intends to utilize its existing financing resources,
mainly General Electric Company and DVI Financial Services.
4
The following table indicates the principal diagnostic procedures
available at each of the imaging centers in which the Company has a management
and/or ownership interest.
Mammo- Ultra- Diagnostic Nuclear
Center MRI Open MRI CT PET graphy sound Radiology Medicine
------ --- -------- -- --- ------ ------ ---------- --------
Tower Division:
Roxsan * * * *
Wilshire * * * * *
Women's * *
Antelope Valley *
Burbank * * * * * * *
Camarillo** * * *
Chino*
Emeryville *
Fresno * * * * *
La Habra * *
Lancaster
[Two Sites] * * * * * *
Long Beach
[Four Sites] * * * * * *
Modesto * * * * *
Northridge * * * * * *
North County**
[San Diego] * *
Orange
[Two Sites] * * * * * *
Oxnard * * * *
Palm Desert
[Three Sites] * * * * *
Palm Springs
[Two Sites] * * * * *
Riverside
[Two Sites]** * * * * * * *
Sacramento * * * * * *
San Francisco *
San Gabriel
Valley * *
Santa Clarita * * * * *
Santa Rosa * *
Stockton/Valley * * * * *
Tarzana
[Two Sites] * * * *
Temecula**
[Three Sites] * * * * *
Thousand
Oaks** * * * * * *
Tustin * *
Vacaville * * * * *
Ventura
[Four Sites] * * * * * * *
Westchester * * * * * * *
*Indicates availability
**Indicates a DIS facility
5
MANAGEMENT SERVICES AND COMPENSATION
The Company has entered into management agreements with respect to its
imaging centers with various physicians and physician groups [the "Physician
Group"]. Pursuant to the typical management agreement, the Company makes
available the imaging center facilities and all of the furniture and medical
equipment at such facilities for use by the Physician Group and the Physician
Group is responsible for staffing the center with qualified medical personnel.
In addition, the Company provides management services and administration of the
non-medical functions and services relating to the medical practice at the
center including among other functions, provision of clerical and administrative
personnel, bookkeeping and accounting services, billing and collection,
provision of medical and office supplies, secretarial, reception and
transcription services, maintenance of medical records, advertising, marketing
and promotional activities and the preparation and filing of all forms, reports
and returns required in connection with unemployment insurance, workers'
compensation insurance, disability, social security and similar laws. As
compensation for the services furnished under the management agreement, the
Company is paid a management fee equal to an agreed percentage of the medical
practice billings, as and when collected, varying between 70% to 85% of such
collections.
At the partnership imaging centers, RadNet has entered into a
management agreement to provide management, administrative and billing and
collection services for a management fee which is a percent of the gross monthly
receipts received for services performed at the center. In addition, as a joint
venture partner, the Company is entitled to 50% to 75% of income after deduction
of all expenses including amounts paid for medical services and medical
supervision, varying based upon the Company ownership interest.
At most of the Company's imaging centers, the medical services
including medical supervision are supplied by Beverly Radiology Medical Group
["BRMG"]. BRMG is 99% owned by Dr. Howard Berger [see "Items 11, 12 and 13"].
RadNet has a Management and Services Agreement with BRMG for a ten-year term
until June 2002, terminable prior thereto at RadNet's election upon the
occurrence of certain events including a change in BRMG's ownership such that
Dr. Berger is no longer an owner in the aggregate of at least 60% of the equity
ownership of BRMG. It is presently contemplated that the agreement will be
extended. As compensation for its services furnished under the Management and
Services Agreement, BRMG has agreed to pay a management fee to the Company equal
to 74% of its medical practice receipts at the contracted centers, as and when
collected.
EQUIPMENT
The most expensive types of diagnostic medical equipment found at the
imaging centers owned or managed by the Company are the MRI, CT and PET systems.
As set forth in the chart under "Imaging Centers" above, 32 centers provide MRI
services 24 centers provide CT services and four centers provide PET services.
The majority of the MRI systems, CT systems and PET systems at the Company's
imaging centers are manufactured by General Electric. The acquisition of these
systems as well as the acquisition of the other relatively expensive diagnostic
medical equipment at the various imaging centers has been effected through
various financing arrangements directly with the manufacturer involving the use
of capital leases with purchase options at minimal prices at the end of the
lease term, the issuance of long term installment notes and the use of operating
leases with purchase options at substantial prices at the end of the lease term.
At October 31, 2001, capital lease obligations totaled approximately $41 million
through August 2008 including current installments totaling approximately seven
million dollars. Also at October 31, 2001, installment notes payable totaled
approximately $89 million through March 2008 including current installments of
approximately $32 million [including line of credit balances of approximately
$21 million]. Commitments under equipment operating leases at October 31, 2001,
were approximately $10 million through August 2007, including current
obligations of approximately $2.3 million. To the extent additional imaging
centers are opened or acquired, these obligations could materially increase. See
the above described chart as to the other equipment available at each imaging
center.
6
The MRI, CT and PET systems and the other diagnostic medical equipment
at the imaging centers owned or managed by the Company are subject to
technological obsolescence as medical imaging is a field in which there is
constant development of new techniques and technologies. The Company maintains
an agreement with GE Medical Systems ("GEMS") whereby GEMS has agreed to be
responsible for the maintenance and repair of a majority of the Company's
equipment based upon a percentage of the Company's revenues. The Company
believes this to be an effective method for controlling this cost.
MARKETING
The patients who undergo diagnostic medical imaging procedures at the
various Company owned or managed imaging centers are generally referred by
individual independent physicians, by Independent Physician Associations
["IPAs"] consisting of groups of physicians, and by Health Maintenance
Organizations ["HMOs"], Preferred Provider Organizations ["PPOs"], and similar
organizations which enroll subscribers on a contractual basis to whom they
deliver healthcare services. Such organizations attempt to control the cost of
healthcare services by directing their enrollees to participating physicians and
institutions and often through aggressive utilization review and limitations on
access to physician specialists, attempt to further limit the cost of medical
service delivery. Such organizations typically develop, on a regional basis,
where an appropriate enrollee population and mix of participating physicians and
institutions are available.
The Company currently employs 21 full-time marketing and sales
personnel who are compensated on a salary or salary plus commission basis and
who periodically inform the medical community including individual physicians
and the administrators of IPAs, HMOs, PPOs, and similar organizations throughout
California as to the services provided at the Company's imaging centers.
Patients are obtained by direct referral or through contract. Some contracts,
referred to as "capitation contracts", provide for a fixed fee per organization
member, which is paid to the medical service provider. Under a "capitation"
contract, the provider agrees to provide specified services to the organization
members for a fixed, predetermined payment per member for a specified time
period [usually one year], regardless of how many times the member uses the
service. No assurances can be given that any of the current or future
"capitation" contracts will be profitable as there is a possibility that
management could underestimate the number of times the services at its imaging
centers will be used by the contracting organization's members during the
contract term.
COMPETITION
The health care industry in general, and the market for diagnostic
imaging services in particular, are highly competitive. The Company competes
principally on the basis of its reputation for productive and cost-effective
quality services. The Company's operations must compete with groups of
radiologists, established hospitals and certain other independent organizations,
including equipment manufacturers and leasing companies, that own and operate
imaging equipment. Many of the Company's direct competitors that provide
contract diagnostic imaging services may have access to greater financial
resources than the Company.
Certain hospitals, particularly the larger hospitals, may be expected
to directly acquire and operate imaging equipment on-site as part of their
overall inpatient servicing capability, subject only to their decision to
acquire a diagnostic imaging system, assume the associated financial risk and
employ the necessary technologists. Historically, smaller hospitals have been
reluctant to purchase imaging equipment. This reluctance, however, has
encouraged the entry of start-up ventures and more established business
operations into the diagnostic services business. As a result, there is
significant excess capacity in the diagnostic imaging business in the Untied
States, which negatively affects utilization and reimbursement.
CUSTOMERS AND FEES
The Company's operations are principally dependent on the Company's
ability to attract referrals from physicians and other health care providers.
The Company's eligibility to provide service in response to a referral is often
dependent on the existence of a contractual arrangement with the referred
patient's insurance carrier or other payor organization. The Company currently
has in excess of 400 contracts with various payor organizations for diagnostic
imaging services provided at the Company's centers primarily on a discounted
7
fee-for-service basis. Managed care contracting has become very competitive and
reimbursement schedules are at or below Medicare reimbursement levels. A
significant decline in referrals and/or reimbursement rates would adversely
affect the Company's business, financial condition and results of operations. In
this regard, Medicare has determined to reduce its reimbursement rates for
calendar year 2002 diagnostic imaging services on an average of 8% for the
various procedures involved. A review of the reduction in relation to the
services offered by the Company indicates that the impact on the Company will
likely be about a 4% reduction in Medicare payments, although its exact impact
can not presently be determined.
INSURANCE
The Company and BRMG each maintain a medical malpractice insurance
coverage of $1,000,000 per claim per doctor and $3,000,000 in the aggregate
covering each physician at the various imaging centers. The policy provides
ongoing coverage from any claims made by patients seen by the physicians as well
as coverage for all of the Company's non-medical personnel at each center
against medical malpractice claims. All other non-BRMG physicians who perform
medical services at the various imaging centers are required to maintain medical
malpractice insurance coverage with similar limits. Although management believes
that such levels of insurance are adequate, there can be no assurance. In
addition, the Company maintains property and equipment insurance coverage of
$62,000,000 and business interruption insurance of $29,000,000. General
liability insurance coverage of $1,000,000 per occurrence and $2,000,000 in the
aggregate with $5,000,000 umbrella coverage is also maintained by the Company.
EMPLOYEES
At October 31, 2001, the Company had a total of 809 full-time and 146
part-time or per-diem employees of whom 11 served in executive positions, 388
supplied technical and managerial services at the various imaging centers, and
556 provided administrative, transcription, clerical and similar services.
None of the Company's employees are subject to a collective bargaining
agreement nor had the Company experienced any work stoppages. The Company
believes that its employee relations are good.
GOVERNMENT REGULATION
The health care industry is highly regulated and changes in laws and
regulations can be significant. Changes in the law or new interpretation of
existing laws can have a material effect on permissible activities of the
Company, the relative costs associated with doing business and the amount of
reimbursement by government and other third-party payors. The federal government
and California regulate various aspects of the Company's business. Failure to
comply with these laws could adversely affect the Company's ability to receive
reimbursement for its services and subject the Company and its officers to
penalties.
ANTI-KICKBACK STATUTES. The Company is subject to federal and state
laws, which govern financial and other arrangements between health care
providers. These include the federal anti-kickback statute which prohibits
bribes, kickbacks, rebates and any other direct or indirect remuneration in
return for or to induce the referral of an individual to a person for the
furnishing, directing or arranging of services, items or equipment for which
payment may be made in whole or in part under Medicare, Medicaid or other
federal health care programs. Violation of the anti-kickback statute may result
in criminal penalties and exclusion from the Medicare and other federal health
care programs. California has enacted similar statutes, which are not limited to
items and services paid for under Medicare or a federally funded health care
program. In recent years, there has been increasing scrutiny by law enforcement
authorities, the Department of Health and Human Services ("HHS"), the courts and
8
Congress of financial arrangements between health care providers and potential
sources of patient and similar referrals of business to ensure that such
arrangements are not designed as mechanisms to pay for patient referrals. HHS
interprets the anti-kickback statute broadly to apply, under certain
circumstances, to distributions of partnership and corporate profits to
investors who refer federal health care program patients to a corporation or
partnership in which they have an ownership interest and to payments for service
contracts and equipment leases that are designed to provide direct or indirect
remuneration for patient referrals or similar opportunities to furnish
reimbursable items or services. In July 1991, HHS issued "safe harbor"
regulations that set forth certain provisions which, if met, will assure that
health care providers and other parties who refer patients or other business
opportunities, or who provide reimbursable items or services, will be deemed not
to violate the anti-kickback statute. The Company is also subject to separate
laws governing the submission of false claims. The Company believes that its
operations materially comply with the anti-kickback statutes.
STARK II, CALIFORNIA PHYSICIAN SELF-REFERRAL LAWS. A federal law,
commonly known as the "Stark Law" or "Stark II," also imposes civil penalties
and exclusions for referrals for "designated health services" by physicians to
certain entities with which they have a financial relationship (subject to
certain exceptions). "Designated health services" include, among other things,
radiology services, including MRIs, CTs and ultrasound. The law applies only to
services reimbursable by Medicare or Medicaid. In addition, California has
enacted legislation that prohibits "physician self-referral" arrangements or
requires physicians to disclose to their patients any financial interest they
may have with a health care provider whom they recommend. Possible sanctions for
violating these provisions include loss of licensure and civil and criminal
sanctions. Such state laws have not been interpreted by the courts or regulatory
agencies. Nonetheless, strict enforcement of these requirements is likely.
Although the Company believes its operations materially comply with these
federal and California physician self-referral laws, there can be no assurance
that Stark II or other regulations will not be interpreted or changed in a
manner that would have a material adverse effect on the Company's business,
financial condition or results of operations.
FDA. The U.S. Food and Drug Administration ("FDA") has issued the
requisite premarket approval for all of the MRI and CT systems utilized by the
Company. The Company does not believe that any further FDA approval is required
in connection with equipment currently in operation or proposed to be operated;
except under regulations issued by the FDA pursuant to the Mammography Quality
Standards Act of 1992, all mammography facilities are required to be accredited
by an approved non-profit organization or state agency. Pursuant to the
accreditation process each facility providing mammography services must comply
with certain standards including annual inspection.
Compliance with theses standards is required to obtain payment for
Medicare services and to avoid various sanctions, including monetary penalties,
or suspension of certification. Although all of the Company's facilities which
provide mammography services are currently accredited by the Mammography
Accreditation Program of the American College of Radiology and the Company
anticipates continuing to meet the requirements for accreditation, the
withdrawal of such accreditation could result in the revocation of
certification. Congress has extended Medicare benefits to include coverage of
screening mammography subject to the prescribed quality standards described
above. The regulations apply to diagnostic mammography and image quality
examination as well as screening mammography.
RADIOLOGIST LICENSING. The radiologists with whom the Company enters
into agreements to provide professional services are subject to licensing and
related regulations by the State of California. As a result, the Company
requires its radiologists to have and maintain appropriate licensure. The
Company does not believe that such laws and regulations will either prohibit or
require licensure approval of its business operations, although no assurances
can be made that such laws and regulations will not be interpreted to extend
such prohibitions or requirements to the Company's operations.
9
REIMBURSEMENT OF HEALTH CARE COSTS
MEDICARE. Beginning in late 1983, prospective payment regulations
became effective under the federal Medicare program. The Medicare program
provides reimbursement for hospitalization, physician, diagnostic and certain
other services to eligible persons 65 years of age and over and certain others.
Providers of service are paid by the federal government in accordance with
regulations promulgated by the HHS and generally accept said payment with
nominal co-insurance amounts required to be paid by the service recipient, as
payment in full. In general, these regulations provide for a specific
prospective payment to reimburse healthcare providers based upon the diagnosis
of the patient.
Congressional and regulatory actions reflect industry-wide cost
containment pressures which the Company believes will affect all health care
providers for the foreseeable future. A recent initiative by CMS to impose a 24%
reduction in diagnostic imaging reimbursement over a four year period beginning
January 1999 was indefinitely postponed due to flaws in CMS's imaging center
cost study. The Centers for Medicare and Medicaid Services ("CMS") has indicated
that it will continue to evaluate diagnostic imaging reimbursement; although, in
January 2001, CMS reduced reimbursement for certain diagnostic imaging services
by up to approximately 8% depending on the type of diagnostic imaging services
provided. The Company has reviewed the procedures involved and does not believe
the reduction will have a material negative impact on the Company's revenues.
MEDICAID. The Medicaid program is a combined federal and state program
providing coverage for low-income persons. The specific services offered and
reimbursement methods vary from state to state. In California, Medicaid
reimbursement is patterned after the Medicare program. Changes in Medicaid
program reimbursements are not expected to have a material adverse impact on the
Company's business, financial condition and results of operations.
MANAGED CARE. Health Maintenance Organizations ("HMOs") and Preferred
Provider Organizations ("PPOs") attempt to control the cost of health care
services. Managed care contracting has become very competitive and reimbursement
schedules are at or below Medicare reimbursement levels. The development and
expansion of HMOs, PPOs and other managed care organizations within the
Company's network could have a negative impact on utilization of the Company's
services and/or affect the revenue per procedure which the Company can collect,
since such organizations will exert greater control over patients' access to
diagnostic imaging services, the selections of the provider of such services and
the reimbursement thereof. The Company also expects that the excess capacity of
equipment in California may negatively impact operations because of the
competition among health care providers for contracts with all types of managed
care organizations. As a result of such competition, the length of term of any
contracts, which the Company may obtain, and the payment to the Company for such
services may also be negatively affected.
PRIVATE INSURANCE. Private health insurance programs generally have
authorized the payment for the Company's services on satisfactory terms and CMS
has authorized reimbursement under the federal Medicare program for
substantially all diagnostic imaging and treatment services currently being
provided by the Company. However, if Medicare reimbursement is reduced, the
Company believes that private health insurance programs will also reduce
reimbursement in response to reductions in government reimbursement, which could
have an adverse impact on the Company's business, financial condition and
results of operations.
CORPORATE PRACTICE OF MEDICINE. In California, a lay person or any
entity other than a professional corporation is not allowed to practice any of
the healing arts including by employing professional persons who have any
ownership interest or profit participation in or control over any healing arts
professional practice. This doctrine is commonly referred to as the prohibition
on the "corporate practice" of medicine. The Company believes that arrangements
for the management of medical practices have, in fact, become quite common in
California, and have not generally been challenged with regard to the corporate
practice issue. However, because these types of arrangements are not required to
be reported, the Company cannot substantiate its belief. There can be no
assurance that the Company's present arrangements with BRMG or the physicians
providing medical services and medical supervision at the Company's imaging
centers will not be challenged, and, if challenged, that they will not be found
to violate the corporate practice prohibition, thus subjecting the Company to
potential damages, injunction and/or civil and criminal penalties.
10
The Company has not received a legal opinion from counsel with regard
to the effect of the corporate practice prohibition on its business as described
herein, and counsel has advised that such an opinion could not be given, because
of the lack of court cases relevant to the issue.
ENVIRONMENTAL. The facilities operated or managed by the Company
generate hazardous and medical waste subject to federal and state requirements
regarding handling and disposal.
The Company believes that the facilities that it operates and manages
are currently in compliance in all material respects with applicable federal,
state and local statutes and ordinances regulating the handling and disposal of
such materials. The Company does not believe that it will be required to expend
any material amounts in order to remain in compliance with these laws and
regulations or that compliance will materially affect its capital expenditures,
earnings or competitive position.
The Company has not received a legal opinion from counsel with regard
to the effect of the prohibitions discussed above on its business as described
herein, and counsel has advised that such an opinion could not be given, because
of the fluid interpretation of the law relevant to the issue.
FORWARD-LOOKING STATEMENTS DISCLOSURE
Except for the historical information contained in this report, certain
statements contained herein are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995, which involve a number of
risks and uncertainties, including, but not limited to, availability of
financing; limitations and delays in reimbursement by third-party payors;
contract renewals and financial stability of customers; technology changes;
governmental regulations; conditions within the health care environment; adverse
utilization trends for certain diagnostic imaging procedures; aggressive
competition; general economic factors; successful integration of acquisitions;
and the risk factors listed from time to time in the Company's filings with the
Securities and Exchange Commission (the "SEC").
11
ITEM 2. PROPERTIES
- ------------------
All of the imaging centers owned or managed by the Company are located
in leased facilities or in owned facilities on leased land with the exception of
the Northridge Imaging Center where the Company owns the building and the land.
Certain information with respect to the imaging centers is as follows:
Center Approx. Sq. Ft.
Wholly-Owned of Center Lease Expiration
------------ --------- ----------------
Tower Division:
[Beverly Hills and Environs]
Roxsan 9,610 March 2011
Women's 3,830 February 2014
Wilshire 13,778 September 2018
Antelope Valley 2,890 In negotiation
Chino 2,700 June 2002
Emeryville 2,086 June 2003
Fresno 5,360 March 2003
La Habra 3,034 December 2002
Lancaster [two sites] 7,827 July 2002
Long Beach - Redondo [three sites] 6,000 December 2001
Long Beach - Los Coyotes 9,300 December 2006
Modesto 17,852 December 2014
Northridge 7,800 N/A
Orange [two sites] 5,876 August 2011
Oxnard 5,100 February 2002
Palm Desert [three sites] 9,424 May 2006
Palm Springs [two sites] 9,442 June 2008
Sacramento 8,083 June 2003
San Francisco 1,240 October 2006
San Gabriel Valley 3,871 December 2002
Santa Clarita 5,782 June 2009
Santa Rosa 4,235 June 2011
Stockton/Valley 4,588 December 2001
Tarzana [two sites] 5,200 December 2007
Tustin 2,139 January 2004
Vacaville 3,920 March 2007
Ventura 12,032 November 2006
Ventura -Loma Vista [three sites] 1,449 January 2002
DIS Centers
-----------
Camarillo 2,035 May 2002
North County [Oceanside/San Diego] 2,314 November 2005
Riverside [two sites] 9,412 July 2006
Temecula [three sites] 9,124 April 2006
Thousand Oaks 8,300 November 2007
Partnership/LLC
---------------
Burbank 5,787 March 2008
Westchester 6,763 July 2006
Rancho Bernardo 9,557 May 2012
Other Facilities
----------------
RadNet [Corp. office] 11,500 May 2003
Warehouse/Other 25,492 Various
12
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Company is engaged from time to time in the defense of lawsuits
arising out of the ordinary course and conduct of its business and has insurance
policies covering such potential insurable losses. The Company believes that the
outcome of any such lawsuits will not have a material adverse impact on the
Company's business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
- ------------------------------------------
STOCK AND RELATED STOCKHOLDER MATTERS
PHS Common Stock is traded in the over-the-counter market on the OTC
Bulletin Board [symbol, "PMDX"]. The following table indicates the high and low
prices for PHS Common Stock for the periods indicated based upon information
supplied by the National Quotation Bureau, Inc. Such quotations reflect
interdealer prices without adjustment for retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
Quarter Ended Low High
------------- --- ----
January 31, 2001 .31 .56
April 30, 2001 .38 .60
July 31, 2001 .55 .78
October 31, 2001 .60 .95
January 31, 2000 .07 .11
April 30, 2000 .09 .52
July 31, 2000 .26 .69
October 31, 2000 .35 .66
The last reported closing high and low prices for PHS Common Stock on the
OTC Bulletin Board on January 25, 2002, were $1.34 and $1.31, respectively. As
of January 25, 2002, the number of holders of record of PHS Common Stock was
4,097. However, a substantial number of PHS' outstanding shares of Common Stock
were owned of record on said date by "Cede & Co.," the nominee for Depository
Trust Company, the clearing agency for most broker-dealers. Management believes
that these shares are beneficially owned by customers of these broker-dealers
and that the number of beneficial owners of PHS Common Stock is substantially
greater than 4,097.
Recent Sales of Unregistered Securities
---------------------------------------
During the fiscal year ended October 31, 2001, the following securities
were sold by the Company pursuant to the exemption to registration provided
under Section 4(2) of the Securities Act of 1933, as amended:
(1) In July and September 2001, the Company issued to eight
individuals, pursuant to the cashless exercise of outstanding
warrants, 65,484 shares of the Company's common stock.
(2) In November 2000, the Company issued 500,000 shares of its
common stock to one individual on exercise of an outstanding
option.
(3) In January 2001, the Company issued 72,784 shares of common
stock to one individual on exercise of an outstanding option.
13
(4) In March 2001, the Company issued 5-year warrants exercisable
at prices of $0.38 to $ 0.40 per share to purchase an
aggregate of 300,000 shares of the Company's common stock to
three individuals.
(5) In April 2001, the Company issued to one individual a 5-year
warrant exercisable at price of $0.43 per share to purchase
1,000,000 of the Company's common stock.
(6) In May 2001, the Company issued to one individual a 5-year
warrant exercisable at a price of $0.55 per share to purchase
3,000,000 shares of the Company's common stock.
(7) In June 2001, the Company issued to one individual a 5-year
warrant exercisable at a price of $0.55 per share to one
individual to purchase 50,000 shares of the Company's common
stock.
(8) In September 2001, the Company issued to one individual a
5-year warrant exercisable at a price of $0.63 per share to
purchase 100,000 shares of the Company's common stock.
(9) During the year ended October 31, 2001, the Company issued
5,542,018 preferred shares in settlement of certain debt
obligations and subsequently retired the stock by
restructuring existing notes payable and combining the
preferred stock balance due of approximately $5,542,000 plus
accrued interest of approximately $235,000. As part of the
refinancing, the Company issued 5-year warrants to purchase
1,000,000 shares of the Company's common stock at an exercise
price of $1.00 per share.
(10) During fiscal 2001, PHS repurchased an aggregate $1,227,000 of
its outstanding debentures for a purchase price of $790,000 of
which $37,000 represented open market purchases from
unaffiliated third parties with the balance having been
acquired from Howard G. Berger, M.D. president and a director
of the Company (See "Item 13").
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------
The selected consolidated financial data presented as of and for the
years ended October 31, 2001, 2000, 1999, 1998 (refer to report on page F-1 of
financial statements included herein re 1998 audit) and 1997 has been derived
from the Company's audited consolidated financial statements and should be read
in conjunction with such consolidated financial statements and related notes as
of and for the years ended October 2001, 2000, 1999, 1998 and 1997, and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this report.
YEARS ENDED
OCTOBER 31,
--------------------------------------------------------------
(000's except per share amounts)
OPERATING DATA: 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Gross Revenues $ 284,981 $ 229,598 $ 170,518 $ 132,595 $ 132,569
Net Revenues after Contractual Allowances 111,837 87,965 72,258 58,821 67,019
Operating Expenses 92,735 73,368 70,359 75,329 74,687
Income [Loss] Before Extraordinary Items 13,947 1,102 (10,627) (29,497) (2,343)
Extraordinary Items- Gain 554 1,512 1,556 955 1,595
Net Income [Loss] 14,501 2,614 (9,071) (28,543) (748)
Income [Loss] Per Common share before .35 .03 (.27) (.75) (.06)
Extraordinary Items
Income [Loss] Per Common Share from .01 .04 .04 .02 .04
Extraordinary Item
Net Income [Loss] Per Common Share .36 .07 (.23) (.73) (.02)
BALANCE SHEET DATA:
Cash and Cash Equivalents 40 36 3 59 130
Total Assets 128,429 90,625 72,247 62,656 86,340
Total Long-Term Liabilities 110,188 82,693 79,023 79,282 76,843
Total Liabilities 174,071 151,538 136,604 118,016 111,270
Working Capital [Deficit] (26,987) (44,588) (38,007) (20,191) (12,027)
Stockholders' Equity [Deficit] (45,642) (60,913) (64,357) (55,360) (24,930)
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
Primedex Health Systems, Inc. provides diagnostic imaging services through its
48 facilities throughout California. The Company arranges for the non-medical
aspects of medical imaging offering MRI, CT, PET, ultrasound, mammography,
nuclear medicine and general diagnostic radiology to the public.
The consolidated financial statements include the accounts of Primedex Health
Systems, Inc., and its subsidiaries outlined as follows:
i) Radnet Management, Inc. ["Radnet"]
Subsidiaries
a. Radnet Sub, Inc. ["Tower"],
b. Tower Imaging Heartcheck,
c. Radnet Managed Imaging Services, Inc. ["RMIS"],
d. SoCal MR Site Management, Inc.,
e. Radnet Management I, Inc.,
f. Radnet Management II, Inc.,
g. Westchester Imaging Group (a 50% joint venture),
h. Burbank Advanced Imaging Center, LLC (a 75%-owned
joint venture)
ii) Diagnostic Imaging Services, Inc. ["DIS"]
Both Radnet and DIS are combined with Beverly Radiology Medical Group
III ["BRMG"]
Operating activities of subsidiary entities are included in the accompanying
financial statements from the date of acquisition. All intercompany transactions
and balances have been eliminated in consolidation and combinations.
Medical services and supervision at most of the Company's imaging centers are
provided through BRMG and through other independent physicians and physician
groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc. and Beverly
Radiology Medical Group, both of which are 99% owned by a shareholder and
president of Primedex Health Systems, Inc.. Radnet and DIS provide non-medical
and administrative services to BRMG for which they receive a management fee.
In June 2001, the Company entered into a Limited Liability Company operating
agreement and started Burbank Advanced Imaging Center, LLC, in which the Company
received a 75% ownership interest. The Company has committed to a capital
contribution of $1,200,000 to fund the opening of a facility in Burbank,
California, in fiscal 2002.
FORWARD-LOOKING INFORMATION
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that the Company will have adequate financial resources to
fund the development and operation of its business, and there will be no
material adverse change in the Company's operations or business. The foregoing
assumptions are based on judgment with respect to, among other things,
information available to the Company, future economic, competitive and market
conditions, future business decisions, and future governmental medical
reimbursement decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the
16
forward-looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward-looking statements will be realized. There are number of other risks
presented by the Company's business and operations which could cause the
Company's financial performance to vary markedly from prior results or results
contemplated by the forward-looking statements. Management decisions, including
budgeting, are subjective in many respects and periodic revisions must be made
to reflect actual conditions and business developments, the impact of which may
cause the Company to alter its capital investment and other expenditures, which
may also adversely affect the Company's results of operations. In light of
significant uncertainties inherent in forward-looking information included in
this Annual Report on Form 10-K, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
Company's objectives or plans will be achieved.
RESULTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 2001 AND 2000
The following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net revenue and the percentage
dollar increase (decrease) of such items from period to period.
PERCENTAGE
PERCENT OF NET REVENUE DOLLAR INCREASE
YEARS ENDED OCTOBER 31, (DECREASE)
--------------------------------------- ---------------------
2001 2000 '00 TO '01
------------------- ------------------- ---------------------
Revenue 254.8% 261.0 % 24.1%
Less: Allowances (154.8) (161.0) 22.2
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 27.1
Operating expense
Operating expenses (69.7) (70.7) 25.4
Depreciation and amortization (9.6) (9.8) 24.8
Provision for bad debts (3.6) (2.9) 55.8
------------------- ------------------- ---------------------
Total operating expense (82.9) (83.4) 26.4
------------------- ------------------- ---------------------
Income from operations 17.1 16.6 30.9
Interest expense, net (12.2) (14.9) 3.7
Other, net 3.3 (0.1) (3952.1)
------------------- ------------------- ---------------------
Income before provision for income 8.2 1.6 574.5
taxes, minority interest and
extraordinary item
Income tax benefit 4.6 -- --
------------------- ------------------- ---------------------
Income before minority interest 12.8 1.6 950.0
and extraordinary item
Minority interest (0.3) (0.3) 32.4
------------------- ------------------- ---------------------
Income before extraordinary item 12.5 1.3 1165.6
Extraordinary item .5 1.7 (63.4)
------------------- ------------------- ---------------------
Net income 13.0 3.0 454.7
=================== =================== =====================
17
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the year ended October 31,
2001 compared to the year ended October 31, 2000. This discussion should be read
in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this annual report.
2001 2000
---- ----
NET REVENUE $111,837,000 $ 87,965,000
- -----------
Net revenue increased approximately $23,872,000, or 27.1%, for the year ended
October 31, 2001, compared to the same period last year. Of the net revenue
increase, 29% was due to the full effect of five new sites acquired in June 2000
[Chino, San Gabriel and Tarzana] and September 2000 [San Francisco and
Emeryville], and 25% was due to the acquisition of three new sites in May 2001
[Modesto] and June 2001 [Palm Springs and Palm Desert], offset by a 6% decrease
due to the sale of the VROC facility in March 2001. The remaining 52% of the
increase was due to new contracts, renegotiation of existing contracts to more
favorable rates, an improved economy with increasing population, and increased
throughput at many sites due to the addition and continued upgrade of medical
equipment. In particular were improvements at the Company's Riverside [HCIC]
facility where net revenues increased approximately 113%, or $2,107,000, due to
the entry into a new capitation agreement coupled with the addition and upgrade
of medical equipment.
OPERATING EXPENSES 2001 2000
- ------------------ ---- ----
OPERATING EXPENSES $ 78,008,000 $ 62,207,000
DEPRECIATION AND AMORTIZATION 10,705,000 8,580,000
PROVISION FOR BAD DEBTS 4,022,000 2,581,000
------------------------------------
TOTAL OPERATING EXPENSES $ 92,735,000 $ 73,368,000
Operating expenses for the year ended October 31, 2001 increased approximately
$15,801,000, or 25%, compared to the same period last year. Of this increase,
19% was due to the full effect of five new sites acquired in June 2000 and
September 2000, 31% was due to the acquisition of three new sites in May 2001
and June 2001 and the start-up costs associated with the future openings of
Burbank Advanced and Tarzana Advanced, offset by a 4% decrease due to the sale
of the VROC facility in March 2001. The remaining 54% of the increase in
operating expenses was primarily due to an increase in the net revenues
including a 34% increase in salaries and professional reading fees, a 7%
increase for the impact of a repair and maintenance contract agreement entered
into on March 1, 2000 which resulted in increased fees from 2.82% to 3.22% of
net revenue effective November 1, 2000, a 5% increase in outside services
including legal, accounting, billing, labor and transcription services, and an
8% increase in other expenses including utilities, insurance and business taxes.
Even with the 27.1% increase in net revenue, medical supply expenditures
increased only 16.8% from the same period last year primarily due to additional
acquisitions of filmless digital equipment at many of the sites and increased
purchase discounts.
Included in operating expenses for the years ended October 31, 2001 and 2000 are
approximately $44,765,000 and $35,402,000, respectively, for salaries and
reading fees, approximately $7,344,000 and $6,334,000, respectively, for
building and equipment rentals, and approximately $25,899,000 and $20,471,000,
respectively, in general and administrative expenditures.
Depreciation and amortization for the year ended October 31, 2001 increased
approximately $2,125,000, or 25%, compared to the same period last year. Of the
increase, 29% was due to the acquisition of equipment, 46% was due to the full
effect of the acquisition of five new sites during fiscal 2000, and 29% was due
to the acquisition of three new sites in fiscal 2001, offset by a 4% decrease
upon the sale of VROC in March 2001.
18
Provision for bad debt for the year ended October 31, 2001 increased
approximately $1,441,000, or 56%, compared to the same period last year. The
primary reason for the increase was due to the growth in revenue coupled with
the Company's overall bad debt percentage increasing from 1.79% of the
contractual adjustments during fiscal 2000 to 2.27% of the contractual
adjustments during fiscal 2001.
2001 2000
---- ----
INTEREST EXPENSE, NET $ 13,620,000 $ 13,140,000
- ---------------------
Net interest expense for the year ended October 31, 2001 increased approximately
$480,000, or 4%, compared to the same period last year. The increase is
primarily a result of acquisitions coupled with new equipment financing offset
by decreases in line of credit interest charges with the corresponding
reductions in the lines of credit balances and the prime interest rate during
the respective periods.
2001 2000
---- ----
OTHER INCOME (LOSS), NET $ 3,698,000 $ (96,000)
- ------------------------
Other income (loss) for the year ended October 31, 2001 increased approximately
$3,794,000. During the year ended October 31, 2001, the Company sold its VROC
facility for $4,000,000 cash and recognized a gain on the sale of approximately
$3,527,000, recognized losses on the sale or disposal of equipment of
approximately $7,000 and generated other income, net of other expense, of
approximately $178,000. During the year ended October 31, 2000, the Company
recognized losses on the sale or disposal of equipment of approximately $335,000
and generated other income, net of other expense, of approximately $239,000.
2001 2000
---- ----
INCOME TAX BENEFIT $ 5,110,000 $ --
- ------------------
For the year ended October 31, 2001, the Company recorded a deferred tax asset
of $5,235,000 offset by an income tax payable of $125,000 (See Note 9).
2001 2000
---- ----
MINORITY INTEREST $ (343,000) $ (259,000)
- -----------------
Minority interest in joint venture represents the minority investor's 50% share
of the Westchester Imaging Group and 25% share of the Burbank Advanced Imaging
Center LLC income for the period. Minority interest expense for the year ended
October 31, 2001 increased approximately $84,000, or 32%, compared to the same
period the previous year. The increase is primarily due to the increased
earnings of Westchester Imaging Group.
2001 2000
---- ----
EXTRAORDINARY ITEM $ 554,000 $ 1,512,000
- ------------------
Extraordinary gains represent the repurchase of subordinated bond debentures and
the write-off or settlement of limited partner notes at a discount.
19
RESULTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
The following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net revenue and the percentage
dollar increase (decrease) of such items from period to period.
PERCENTAGE
PERCENT OF NET REVENUE DOLLAR INCREASE
YEARS ENDED OCTOBER 31, (DECREASE)
--------------------------------------- ---------------------
2000 1999 '99 TO '00
------------------- ------------------- ---------------------
Revenue 261.0 % 236.0 % 34.6%
Less: Allowances (161.0) (136.0) 44.1
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 21.7
Operating expense
Operating expenses (70.7) (81.7) 5.3
Depreciation and amortization (9.8) (10.7) 11.3
Provision for bad debts (2.9) (4.3) (17.0)
Impairment loss -- (.7) (100.0)
long-lived assets
------------------- ------------------- ---------------------
Total operating expense (83.4) (97.4) 4.3
------------------- ------------------- ---------------------
Income from operations 16.6 2.6 668.7
Interest expense, net (14.9) (14.8) 23.1
Other, net (0.1) (2.7) (95.2)
------------------- ------------------- ---------------------
Income before minority interest 1.6 (14.9) 112.6
and extraordinary item
Minority interest (0.3) 0.2 (290.4)
------------------- ------------------- ---------------------
Income before extraordinary item 1.3 (14.7) 110.4
Extraordinary item 1.7 2.1 (2.8)
------------------- ------------------- ---------------------
Net income 3.0 (12.6) 128.8
=================== =================== =====================
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the year ended October 31,
2000 compared to the year ended October 31, 1999. This discussion should be read
in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this annual report.
2000 1999
---- ----
NET REVENUE $ 87,965,000 $ 72,258,000
- -----------
Net revenue increased approximately $15,707,000, or 21.7%, for the year ended
October 31, 2000, compared to the same period the previous year. Of the net
revenue increase, 1.4% was due to the full effect of three new sites acquired in
January 1999 [Redondo], 26.3% was due to the acquisition or opening of six new
sites in November 1999 [Los Coyotes], June 2000 [Chino, San Gabriel and Tarzana]
and September 2000 [San Francisco and Emeryville], offset by a 6.9% decrease due
to the closure and final expenses for three facilities throughout fiscal 1999
[450 Sutter, Parkside and Corona]. The remaining 79.2% of the increase was due
to new contracts, renegotiation of existing contracts to more favorable rates,
an improved economy with increasing population, and increased throughput at many
sites due to the addition and continued upgrade of medical equipment. In
particular were improvements at the Company's Orange facility where net revenues
increased approximately 172.5%, or $4,426,000, due to the entry into a new
capitation agreement coupled with the addition and upgrade of medical equipment.
20
OPERATING EXPENSES 2000 1999
- ------------------ ---- ----
OPERATING EXPENSES $ 62,207,000 $ 59,060,000
DEPRECIATION AND AMORTIZATION 8,580,000 7,709,000
PROVISION FOR BAD DEBTS 2,581,000 3,111,000
IMPAIRMENT LOSS ON LONG-LIVED ASSETS -- 479,000
------------------------------------
TOTAL OPERATING EXPENSES $ 73,368,000 $ 70,359,000
Operating expenses for the year ended October 31, 2000 increased approximately
$3,147,000, or 5.3%, compared to the same period the previous year. Of this
increase, 10.2% was due to the full effect of three new sites acquired in
January 1999, 66.2% was due to the acquisition or opening of six new sites
during fiscal 2000, offset by a 33.8% decrease due to the closure and final
expenses for three facilities throughout fiscal 1999. The remaining 57.4% of the
increase in operating expenses was primarily due to an increase in the net
revenues including a 12.3% increase in salaries and professional reading fees
and a 48.7% increase in equipment rental for additional operating leases entered
into during fiscal 2000. Even with the increase in net revenue, outside services
expenditures decreased approximately $2,178,000, or 61.4%, compared to the same
period the previous year due to decreased legal expenditures and offsets from
the Company's D&O insurance.
Included in operating expenses for the years ended October 31, 2000 and 1999 is
approximately $35,402,000 and $30,991,000, respectively, for salaries and
reading fees, approximately $6,334,000 and $5,945,000, respectively, for
building and equipment rentals, and approximately $20,471,000 and $22,124,000,
respectively, in general and administrative expenditures.
Depreciation and amortization for the year ended October 31, 2000 increased
approximately $871,000, or 11.3%, compared to the same period the previous year.
Of this increase, 43% was due to the acquisition of equipment, 3% was due to the
full effect of the acquisition of three new sites during fiscal 1999, and 65%
was due to the acquisition or opening of six new sites during fiscal 2000,
offset by a 11% decrease in depreciation expense due to the closings or final
expenditures of three sites throughout fiscal 1999.
Provision for bad debt for the year ended October 31, 2000 decreased
approximately $530,000, or 17%, compared to the same period the previous year.
Even with the increase in net revenue, the Company's overall bad debt percentage
decreased from 3% of the contractual adjustments during fiscal 1999 to less than
2% of the contractual adjustments during fiscal 2000.
2000 1999
---- ----
INTEREST EXPENSE, NET $ 13,140,000 $ 10,674,000
- ---------------------
Net interest expense for the year ended October 31, 2000 increased approximately
$2,466,000, or 23%, compared to the same period the previous year. The increase
is primarily a result of acquisitions, new equipment financing and increased
lines of credit borrowings.
21
2000 1999
---- ----
OTHER, NET $ (96,000) $ (1,988,000)
- ----------
Net other expense for the year ended October 31, 2000 decreased approximately
$1,892,000, or 95%, compared to the same period the previous year. During fiscal
1999, the Company recognized a loss on legal judgments and settlements of
approximately $2,456,000.
2000 1999
---- ----
MINORITY INTEREST $ (259,000) $ 136,000
- -----------------
Minority interest in joint venture represents the minority investor's 50% share
of the Westchester Imaging Group income for the period. Minority interest
expense for the year ended October 31, 2000 increased approximately $395,000, or
290%, compared to the same period the previous year. The increase is due to the
increased earnings of Westchester Imaging Group.
2000 1999
---- ----
EXTRAORDINARY ITEM $ 1,512,000 $ 1,556,000
- ------------------
Extraordinary gains represent the repurchase of subordinated bond debentures,
the settlement of debt and limited partner notes at a discount and the write-off
of limited partner notes.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased for the years ended October 31, 2001 and 2000 by $4,000 and
$33,000, respectively.
Cash used by investing activities for the year ended October 31, 2001 was
$2,833,000 compared to $3,294,000 for the same period in 2000. For the years
ended October 31, 2001 and 2000, the Company purchased property and equipment
for approximately $7,469,000 and $4,559,000, respectively, received proceeds
from the sale of centers or trade-in of equipment for $5,050,000 and $1,540,000,
respectively, paid loan fees of $20,000 and $70,000, respectively, and loaned
$233,000 and $205,000, respectively, to related parties. In addition, during the
year ended October 31, 2001, the Company invested $100,000 in VROC, purchased
59,000 shares of DIS common stock for approximately $30,000, and acquired some
of the assets of Sadler Radiology for approximately $31,000.
Cash used for financing activities for the year ended October 31, 2001 was
$10,749,000 compared to $4,779,000 for the same period in 2000. For the years
ended October 31, 2001 and 2000, the Company made principal payments on capital
leases and notes payable of approximately $16,764,000 and $11,652,000,
respectively, received proceeds from borrowing under existing lines of credit
and refinancing arrangements of approximately $3,883,000 and $7,516,000,
respectively, purchased subordinated debentures for approximately $36,000 and
$122,000, respectively, and made joint venture distributions of $100,000 and
$200,000, respectively. In addition, during the year ended October 31, 2001, the
Company received proceeds from the issuance of common stock of approximately
$97,000, received $400,000 from its limited partners in a new venture and
increased its cash disbursements in transit by $1,771,000. During the year ended
October 31, 2000, the Company decreased its cash disbursements in transit by
$321,000.
At October 31, 2001, the Company had a working capital deficit of $26,987,000 as
compared to a working capital deficit of $44,588,000 at October 31, 2000,
representing a decreased deficit of $17,601,000. Over the past several years,
management has been addressing the issues that have lead to these deficiencies,
and the results of management's plans and efforts have been positive as
22
indicated by improvements in operating income and profitability for the past two
years. However, continued effort is planned in the future to allow the Company
to continue to operate profitably. Such actions and plans include:
o Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. In fiscal 2001, the Company
acquired an imaging center in Modesto. In December 2001, the Company
opened a new center in Burbank. The centers have experienced favorable
performance in their initial months of operations.
o Increase revenue by negotiating new and existing capitation and managed
care contracts for additional services and more favorable terms. During
the year ended October 31, 2000, the Company renegotiated many of its
existing capitation contracts increasing its monthly rates. In January
2001, the Company successfully renegotiated an additional capitation
contract for its Long Beach facilities increasing the contracted
reimbursement approximately 26%.
o Increase net revenue and decrease operating losses by eliminating poor
performing capitation and managed care contracts where reimbursement
falls short of the Company's costs. In January 2001, the Company
stopped providing services for one capitation contract which improved
profitability in the Company's Tower facility.
o Consolidate under-performing facilities to reduce operating cost
duplication and improve operating income. In January 2001, the Company
consolidated its Auburn facility with its Scripps site in Sacramento.
o Continue to evaluate all facilities' operations and trim excess
operating and general and administrative costs where it is feasible to
do so.
o Continue to selectively acquire new medical equipment and replace old
and obsolete equipment in order to increase service volume and
throughput at many facilities. During the last few fiscal years, the
Company has had continued success in these endeavors with significant
increases in volume at most of its facilities.
o Continue to work with lessors and lenders to extend terms of leases and
financing to accommodate cash flow requirements for ongoing agreements
and upon the expiration of leases and notes. The Company has
demonstrated continued success in renegotiation of many of its existing
notes payable and capital lease obligations by extending payment terms,
reducing interest rates, reducing or eliminating monthly payments and
creating long-term balloon payments. During fiscal 2001, one of the
Company's major lenders agreed to convert $5,542,000 of the Company's
current debt into a new series of notes by restructuring existing notes
payable, increasing monthly payments and extending terms. In addition,
the Company eliminated a second line of credit with DVI Business Credit
consolidating its balances into two existing notes increasing credit
terms and improving current liabilities and working capital. The
Company's long-term relationships with its lenders and their continued
confidence in their extensions of credit is critical to the Company's
success.
o Continue to settle historical notes payable, subordinated bond
debentures and other debt at a discount.
o Depending on price, market circumstances and strategic buyers, the
Company may look to liquidate non core assets. In March 2001, the
Company sold its only radiation therapy center ("VROC") for $4,000,000
and generated a gain of approximately $3,527,000.
Notwithstanding the continued (though improving) working capital deficiency,
substantial doubt about the entity's ability to continue as a going concern is
alleviated by mitigating factors. Those mitigating factors include the
23
aforementioned actions and plans by management combined with the increasing
positive cash flow from operations, unused availability of the Company's working
capital lines of credit, and the willingness of existing lenders to offer
alternative debt financing and payment plans.
The Company's future obligations for debt and equipment under capital lease for
the next five years, including lines of credit, will be approximately
$49,430,000, $28,400,000, $25,545,000, $21,680,000 and $24,590,000,
respectively. Interest expense, excluding interest expense on operating lines of
credit and subordinated bond debentures, for the next five years, included in
the above payments, will be approximately $10,260,000, $8,290,000, $6,200,000,
$4,310,000 and $2,000,000, respectively. The Company estimates interest on its
bond debentures to be approximately $1,630,000 in fiscal 2002. In addition, the
Company has noncancelable operating leases for the use of its facilities and
certain medical equipment, which will average approximately $5,580,000 in annual
payments over the next five years.
Effective March 1, 2000, the Company entered into an agreement with GE Medical
Systems for the maintenance of the majority of its medical equipment for a fee
based upon a percentage of net revenues with minimum aggregate net revenue
requirements. In August 2001, the agreement was amended and expires on October
31, 2005. The service fee ranges from 2.82% to 3.74% of net revenue [less
provisions for bad debt] and the aggregate minimum net revenue ranges from
$85,000,000 to $125,000,000 during the term of the agreement. For the year ended
October 31, 2001, the monthly service fees were 3.22% of net revenues.
The Company's working capital needs are currently provided under two lines of
credit. Under one agreement with Coast Business Credit, due December 31, 2003,
the Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$22,000,000 or the prior 120-days' cash collections. In any scenario, the
Company may borrow up to the aggregate collection of receivables in the prior
120-days as long as the collections in any one month do not decrease by more
than 25% from the prior month. Borrowings under this line are repayable together
with interest at an annual rate equal to the greater of (a) the bank's prime
rate plus 2.5%, or (b) 8%. The lender holds a first lien on substantially all of
Radnet's ["Beverly Radiology's"] assets, the President and C.E.O. of PHS has
personally guaranteed $10,000,000 of the loans and the credit line is
collateralized by a $5,000,000 life insurance policy on the President and C.E.O.
of PHS. At October 31, 2001, $18,429,000 was outstanding under this line.
Under a second line of credit with DVI Business Credit, the Company may borrow
the lesser of 110% of the eligible accounts receivable or $5,000,000. The line,
originally due October 31, 2000, is currently on a month-to-month basis pending
renegotiation. The credit line is collateralized by approximately 80% of the
Tower division's accounts receivable. Borrowings under this line are repayable
together with interest at an annual rate equal to the bank's prime rate plus
1.0%. At October 31, 2001, $2,323,000 was outstanding under this line.
24
NEW AUTHORITATIVE PRONOUNCEMENTS
During 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standard No. 141 ("Business Combinations"), No. 142
("Goodwill and Other Intangible Assets"), No. 143 ("Accounting for Asset
Retirement Obligations"), No. 144 ("Accounting for the Impairment or Disposal of
Long-Lived Assets") which are effective for fiscal 2002. SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separately
from goodwill. SFAS 142 will require that goodwill and certain intangibles no
longer be amortized, but instead tested for impairment at least annually. SFAS
142 is required to be applied starting with fiscal years beginning after
December 15, 2001, with early application permitted in certain circumstances.
The Company plans to adopt SFAS 142 in fiscal 2002 and does not expect any
impairment of goodwill upon adoption. Goodwill amortization was approximately
$1,354,000 in fiscal 2001 and approximately $903,000 in fiscal 2000.
INFLATION
To date, inflation has not had a material effect on the Company's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The Financial Statements are attached hereto and begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- -----------------------------------------------------
Inapplicable.
25
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
We have audited the accompanying consolidated balance sheets of Primedex Health
Systems, Inc. and affiliates as of October 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the years in the three-year period ended October 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Primedex Health Systems, Inc.
and affiliates as of October 31, 2001 and 2000, and the consolidated results of
their operations and cash flows for each of the years in the three-year period
ended October 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/S/ MOSS ADAMS LLP
Los Angeles, California
January 18, 2002
F-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILATES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2000 2001
- ---------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 36,000 $ 40,000
Accounts receivable, net 20,365,000 28,764,000
Unbilled receivables and other receivables 1,689,000 133,000
Due from related party 433,000 94,000
Deferred income taxes - 5,235,000
Other 1,075,000 1,328,000
-------------- --------------
Total current assets 23,598,000 35,594,000
-------------- --------------
PROPERTY AND EQUIPMENT, net 44,358,000 65,368,000
-------------- --------------
OTHER ASSETS
Accounts receivable, net 2,110,000 2,499,000
Due from related parties 96,000 60,000
Goodwill, net 19,339,000 24,064,000
Other 1,124,000 844,000
-------------- --------------
Total other assets 22,669,000 27,467,000
-------------- --------------
$ 90,625,000 $ 128,429,000
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Cash disbursement in transit $ 2,032,000 $ 3,804,000
Accounts payable and accrued expenses 15,416,000 19,361,000
Income taxes payable - 125,000
Notes payable to related party 2,554,000 119,000
Current portion of notes and leases payable 48,184,000 39,172,000
-------------- --------------
Total current liabilities 68,186,000 62,581,000
LONG-TERM LIABILITIES
Subordinated debentures payable 17,530,000 16,303,000
Notes payable to related party - 1,330,000
Notes and leases payable, net of current portion 65,041,000 90,569,000
Accrued expenses 122,000 1,986,000
-------------- --------------
Total long-term liabilities 82,693,000 110,188,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 499,000 1,142,000
REDEEMABLE STOCK 160,000 160,000
STOCKHOLDERS' DEFICIT (60,913,000) (45,642,000)
-------------- --------------
$ 90,625,000 $ 128,429,000
============== ==============
The accompanying notes are an integral part of these financial statements F-2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILATES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1999 2000 2001
- ----------------------------------------------------------------------------------------------------------------
REVENUE
Revenue $ 170,518,000 $ 229,598,000 $ 284,981,000
Less: Allowances 98,260,000 141,633,000 173,144,000
-------------- -------------- --------------
Net revenue 72,258,000 87,965,000 111,837,000
OPERATING EXPENSES
Operating expenses 59,060,000 62,207,000 78,008,000
Depreciation and amortization 7,709,000 8,580,000 10,705,000
Provision for bad debts 3,111,000 2,581,000 4,022,000
Impairment loss on long-lived assets 479,000 - -
-------------- -------------- --------------
Total operating expenses 70,359,000 73,368,000 92,735,000
-------------- -------------- --------------
Income from operations 1,899,000 14,597,000 19,102,000
-------------- -------------- --------------
OTHER EXPENSE
Interest expense, net (10,674,000) (13,140,000) (13,620,000)
Loss on legal judgments and settlements (2,456,000) - -
Gain (loss) on sale of subsidiaries, divisions and assets 70,000 (335,000) 3,520,000
Other 398,000 239,000 178,000
-------------- -------------- --------------
Total other expense (12,662,000) (13,236,000) (9,922,000)
-------------- -------------- --------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY ITEM (10,763,000) 1,361,000 9,180,000
INCOME TAX BENEFIT - - 5,110,000
-------------- -------------- --------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM (10,763,000) 1,361,000 14,290,000
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES 136,000 (259,000) (343,000)
-------------- -------------- --------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (10,627,000) 1,102,000 13,947,000
EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT
OF DEBT (NET OF INCOME TAXES OF $0) 1,556,000 1,512,000 554,000
------------- ------------- -------------
NET INCOME (LOSS) $ (9,071,000) $ 2,614,000 $ 14,501,000
============== ============== ==============
BASIC EARNINGS PER SHARE
Income (loss) before extraordinary gain $ (0.27) $ 0.03 $ 0.35
Extraordinary gain 0.04 0.04 0.01
-------------- -------------- --------------
BASIC NET INCOME (LOSS) PER SHARE $ (0.23) $ 0.07 $ 0.36
============== ============== ==============
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary gain $ (0.27) $ 0.03 $ 0.32
Extraordinary gain 0.04 0.04 0.01
-------------- -------------- --------------
DILUTED NET INCOME (LOSS) PER SHARE $ (0.23) $ 0.07 $ 0.33
============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 38,973,908 38,992,323 39,960,972
============== ============== ==============
Diluted 38,973,908 39,843,422 44,170,547
============== ============== ==============
The accompanying notes are an integral part of these financial statements F-3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED OCTOBER 31, 1999, 2000 AND 2001
- -----------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value,
100,000,000 shares authorized Treasury Stock, at cost
------------------------------ Paid-in -------------------------------
Shares Amount Capital Shares Amount
-------------- -------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 1998 40,757,260 $ 408,000 $ 99,252,000 (1,625,000) $ (615,000)
(unaudited)
Conversion of subordinated
debentures to common stock 500 - 5,000 - -
Purchase of stock put - - 80,000 (200,000) (80,000)
Discounted note, net - - - - -
Net loss - - - - -
-------------- -------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 1999 40,757,760 408,000 99,337,000 (1,825,000) (695,000)
Issuance of common stock 200,000 2,000 28,000 - -
Discounted note, used to retire
subordinated debentures - - - - -
Net income - - - - -
-------------- -------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 2000 40,957,760 410,000 99,365,000 (1,825,000) (695,000)
Issuance of common stock 1,474,250 15,000 743,000 - -
Payment of subscription receivable - - - - -
Net income - - - - -
-------------- -------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 2001 42,432,010 $ 425,000 $ 100,108,000 (1,825,000) $ (695,000)
============== ============== ============== ============== ==============
continued below:
Stock Total
Accumulated Due from Subscription Stockholders'
Deficit Related Party Receivable Deficit
-------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 1998 $(153,476,000) $ (899,000) $ (30,000) $ (55,360,000)
(unaudited)
Conversion of subordinated
debentures to common stock - - - 5,000
Purchase of stock put - - - -
Discounted note, net - 69,000 - 69,000
Net loss (9,071,000) - - (9,071,000)
-------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 1999 (162,547,000) (830,000) (30,000) (64,357,000)
Issuance of common stock - - (30,000) -
Discounted note, used to retire
subordinated debentures - 830,000 - 830,000
Net income 2,614,000 - - 2,614,000
-------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 2000 (159,933,000) - (60,000) (60,913,000)
Issuance of common stock - - - 758,000
Payment of subscription receivable - - 12,000 12,000
Net income 14,501,000 - - 14,501,000
-------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 2001 $(145,432,000) $ - $ (48,000) $ (45,642,000)
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements F-4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999 2000 2001
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (9,071,000) $ 2,614,000 $ 14,501,000
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 7,709,000 8,580,000 10,705,000
Provision for bad debts and allowance adjustments 2,039,000 (25,000) 3,297,000
Loss on legal judgments and settlements 2,456,000 - -
Gain (loss) on write-downs, amortization
and disposals of other assets and accrued liabilities 509,000 417,000 (116,000)
Gain on sale of assets, subsidiaries and divisions (70,000) - (3,527,000)
Imputed interest expense 191,000 1,169,000 1,154,000
Minority interest in earnings of subsidiaries (136,000) 259,000 343,000
Extraordinary gain (1,556,000) (1,512,000) (554,000)
Changes in assets and liabilities:
Accounts receivable (2,593,000) (1,798,000) (12,157,000)
Unbilled receivables (407,000) (1,271,000) 1,556,000
Other assets 254,000 (458,000) (495,000)
Deferred income taxes - - (5,235,000)
Accounts payable and accrued expenses 1,818,000 131,000 3,989,000
Income taxes payable - - 125,000
------------- ------------- -------------
Net cash provided by operating activities 1,143,000 8,106,000 13,586,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of imaging centers - net of cash acquired (100,000) - (61,000)
Purchase of property and equipment (6,657,000) (4,559,000) (7,469,000)
Proceeds from sale of divisions, centers, and equipment 1,089,000 1,540,000 5,050,000
Loan fees (118,000) (70,000) (20,000)
Investment in center - - (100,000)
Loans to related parties (80,000) (205,000) (233,000)
------------- ------------- -------------
Net cash used by investing activities (5,866,000) (3,294,000) (2,833,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdraft 624,000 (321,000) 1,771,000
Principal payments on notes and leases payable (14,325,000) (11,652,000) (16,764,000)
Proceeds from short and long-term borrowings 18,860,000 7,516,000 3,883,000
Purchase of treasury stock (55,000) - -
Purchase of subordinated debentures (337,000) (122,000) (36,000)
Proceeds from issuance of common stock - - 97,000
Joint venture proceeds - - 400,000
Joint venture distributions (100,000) (200,000) (100,000)
------------- ------------- -------------
Net cash provided (used) by financing activities 4,667,000 (4,779,000) (10,749,000)
------------- ------------- -------------
NET INCREASE/(DECREASE) IN CASH (56,000) 33,000 4,000
CASH, beginning of year 59,000 3,000 36,000
------------- ------------- -------------
CASH, end of year $ 3,000 $ 36,000 $ 40,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest $ 10,719,000 $ 12,981,000 $ 12,646,000
============= ============= =============
Income taxes $ - $ - $ -
============= ============= =============
The accompanying notes are an integral part of these financial statements F-5
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999, 2000 AND 2001
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES -
The Company entered into capital leases or financed equipment through notes
payable for approximately $12,000,000, $5,135,000 and $21,753,000 for the years
ended October 31, 1999, 2000 and 2001, respectively.
Effective March 1, 2001, the Company's DIS subsidiary sold it Valley
Regional Oncology Center ["VROC"] and recognized a gain on the sale of
$3,527,000. As part of the sale, the Company wrote-off $404,000 in net property
and equipment and $75,000 in net other current assets.
During the year ended October 31, 2001, the Company acquired three
imaging centers. Effective May 10, 2001, the Company acquired the assets and
business of Modesto Imaging Center and recorded net property and equipment of
$1,868,000, notes payable of $6,886,000, other liabilities of $1,032,000 and
goodwill of $6,050,000. Effective June 1, 2001, the Company acquired a portion
of the equipment of two imaging centers located in Palm Springs and Palm Desert,
California and recorded net property and equipment of $376,000, notes payable of
$342,000 and other liabilities of $35,000.
During the year ended October 31, 2001, the Company restructured a
portion of its debt with DVI transferring the liquidation value of its preferred
stock into other notes payable. As part of the transaction, accrued interest of
approximately $235,000 was accumulated into the new notes payable balances.
During the year ended October 31, 2001, warrants for 920,100 shares of
common stock were exercised for approximately $230,000. As part of the
transaction, the Company deducted the exercise price from its notes payable
payment due to the same individuals.
During the year ended October 31, 2001, a cashless exercise of warrants
occurred, and 65,484 shares of common stock were issued to eight note holders of
the Company. In fiscal 1996, these warrants were issued to the note holders with
options for a cashless exercise for common stock if the Company's stock prices
exceeded certain levels.
During the year ended October 31, 2000, the Company acquired the assets
of two open MRI facilities in Northern California for approximately $3,300,000
in notes payable. As part of the transaction, the Company recorded net property
and equipment of approximately $1,900,000 and goodwill of approximately
$1,400,000.
During the year ended October 31, 2000, the Company acquired three
hospital-based MRI centers, previously sold to Diagnostic Health Services, Inc.
["DHS"] in 1997, for approximately $14,200,000 in notes payable. As part of the
transaction, the Company recorded net accounts receivable of approximately
$917,000, net property and equipment of approximately $3,380,000 and goodwill of
approximately $8,240,000. In addition, the Company wrote-off deferred revenue
related to covenants-not-to-compete with DHS of approximately $1,350,000 and
other liabilities of approximately $305,000.
F-6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999, 2000 AND 2001
- --------------------------------------------------------------------------------
During the year ended October 31, 2000, an officer of the Company
exercised his stock options to acquire 200,000 shares of the Company's common
stock at $.15 per share, or $30,000. As of October 31, 2001, approximately
$18,000 remains due to the Company on or before May 3, 2002 and bears interest
at 7.0%.
During the year ended October 31, 2001, the Company exchanged a $635,000
notes receivable from a related party and recorded a related party payable for
approximately $119,000 for the purchase of $1,159,000 of the Company's
subordinated debentures. The Company recorded a $405,000 extraordinary gain as a
result of the transaction.
During the year ended October 31, 2000, the Company exchanged a $894,000
note receivable from a related party for $2,273,000 in subordinated debentures.
The Company recorded a $1,380,000 extraordinary gain as a result of this
transaction.
During the year ended October 31, 1999, $5,000 face value subordinated
bond debentures were converted into 500 shares of the Company's common stock.
During the year ended October 31, 1999, a former employee exercised his
stock put for 200,000 shares of the Company's common stock at $.40 per share. As
part of the transaction, $25,000 in prior loans due from this related party were
utilized as payment.
During the years ended October 31, 1999, the Company recorded goodwill
and notes payable of approximately $429,000 to acquire shares of a subsidiary's
common stock.
During the year ended October 31, 1999, the Company financed $688,410 of
accounts payable and accrued liabilities as long-term debt.
During the year ended October 31, 1999, the Company received $942,645 in
credits for equipment returns and trade-ins, which was offset against the
outstanding debt.
F-7
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS
Primedex Health Systems, Inc., incorporated on October 21, 1985,
provides diagnostic imaging services in the state of California. Imaging
services include MRI, CT, PET, ultrasound, mammography, nuclear medicine and
general diagnostic radiology. The operations of the Company comprise a single
segment for financial reporting purposes.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION - The consolidated financial statements
include the accounts of Primedex Health Systems, Inc.; Radnet Management, Inc.
["Radnet"]; Diagnostic Imaging Services, Inc.["DIS"] and Radnet Managed Imaging
Services, Inc.["RMIS"] (collectively referred to as "the Company"). Radnet
Management, Inc. is combined with Beverly Radiology Medical Group III ["BRMG"]
and consolidated with Radnet Sub, Inc., Westchester Imaging Group (a joint
venture), Radnet Management I, Inc., Radnet Management II, Inc. ["Modesto"],
Burbank Advanced LLC and SoCal MR Site Management, Inc.. Diagnostic Imaging
Services is also combined with BRMG.
Operating activities of subsidiary entities are included in the
accompanying financial statements from the date of acquisition. All intercompany
transactions and balances have been eliminated in consolidation and
combinations.
Medical services and supervision at most of the Company's imaging
centers are provided through BRMG and through other independent physicians and
physician groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc.
and Beverly Radiology Medical Group, both of which are 99% owned by a
shareholder and president of Primedex Health Systems, Inc. Radnet and DIS
provide non-medical, technical and administrative services to BRMG for which
they receive a management fee.
CASH AND CASH EQUIVALENTS - For purposes of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. The carrying amount of cash and
cash equivalents approximates their fair market value.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost,
less accumulated depreciation and amortization and valuation impairment
allowances. Depreciation and amortization of property and equipment are provided
using the straight-line method over the estimated useful lives, which range from
3 to 39 years. Leasehold improvements are amortized over their estimated useful
life, which range from 10 to 20 years.
F-8
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE AND ALLOWANCES - Accounts receivable are stated at
gross amounts billed, less allowances. A significant portion of the Company's
accounts receivable involve third-party payors, primarily insurance companies.
The collection cycle on accounts receivable from continuing operations extends
up to 36 months with most personal injury cases having the longest collection
cycle. The current portion of accounts receivable are the amounts which are
reasonably expected to be collected within one year, based upon historical
collection data.
Accounts receivable as of October 31, 2001, are shown net of
contractual allowances and allowances for doubtful accounts of approximately
$54,211,000, of which $49,878,000 has been deducted from current receivables and
$4,333,000 has been deducted from noncurrent receivables. Accounts receivable as
of October 31, 2000, are shown net of contractual allowances and allowances for
doubtful accounts of approximately $32,114,000, of which $29,100,000 has been
deducted from current receivables and $3,014,000 has been deducted from
noncurrent receivables.
INTANGIBLES - Goodwill is recognized in certain business combinations
and represents the excess of the purchase price over the fair value of net
assets acquired. Goodwill is amortized using the straight-line method over 20
years. Offering costs, loan fees and management fee reduction buyout are
recorded at cost and amortized over the estimated useful lives which range from
1 to 20 years.
REVENUE RECOGNITION -
NET PATIENT SERVICE REVENUE - Net patient service revenue is
reported at the estimated net realizable amounts from patients, third-party
payors, and others for services in the period in which services are provided.
Billing is usually completed by the following month. Premium revenue, net of
prepaid plan revenue, for the year ended October 31, 2000 and 2001 was
approximately $163,093,000 and $217,736,000, respectively.
Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor settlements
are provided in the period the related services are rendered. Differences
between the estimated amounts accrued and interim and final settlements are
reported in operations in the year of settlement.
PREPAID PLAN REVENUE - The Company contracts with health
maintenance organizations and other third parties to provide health care
services to plan enrollees. Under the various contracts, the Company receives a
per enrollee amount (capitated payment) each month covering all contracted
services needed by the plan enrollees. Capitation payments are recognized as
premium revenue during the period in which the Company is obligated to provide
services to the plan enrollees. Gross revenue for the year ended October 31,
2000 and 2001 was approximately $66,505,000 and $67,245,000, respectively. Net
revenue for the year ended October 31, 2000 and 2001 was approximately
$16,779,000 and $19,130,000, respectively.
F-9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES - Income tax expense is computed using an asset and
liability method, using expected annual effective tax rates. Under this method,
deferred income taxes are recorded resulting from differences in the financial
reporting basis and the income tax reporting basis of assets and liabilities.
Income tax are further explained in Note 9.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to credit risk are primarily cash equivalents and accounts
receivable. The Company has placed its cash and cash equivalents with one major
financial institution. At times, the cash in the financial institution is
temporarily in excess of the amount insured by the Federal Deposit Insurance
Corporation (FDIC).
With respect to accounts receivable, the Company routinely assesses the
financial strength of its customers and third-party payors and, based upon
factors surrounding their credit risk, establishes an allowance for
uncollectible accounts. Gross charges by payor for the year ended October 31,
2000 and 2001 were:
2000 2001
---- ----
Capitation contracts 28.9% 23.6%
Special group contract 19.0% 17.8%
HMO/PPO/Managed care 16.8% 21.2%
Medicare 11.1% 11.0%
Blue Cross/Shield/Champus 9.1% 9.3%
Commercial insurance 5.2% 7.2%
Workers Comp 3.6% 4.0%
Medi-cal 2.4% 2.7%
Other 3.9% 3.2%
Management believes that its accounts receivable credit risk exposure,
beyond allowances that have been provided, is limited.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
IMPAIRMENT ON LONG-LIVED ASSETS - Certain long-lived assets of the
Company are reviewed at least annually as to whether their carrying values have
become impaired in accordance with Statement of Financial Accounting Standards
(SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of." Management considers assets to be impaired if the
carrying value exceeds the undiscounted projected cash flows from operations. If
impairment exists, the assets are written down to fair value or the projected
cash flows from related operations. As of October 31, 2001, the Company expects
the remaining carrying value of assets to be fully recoverable.
F-10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS - As permitted by SFAS 123, "Accounting for Stock-Based
Compensation", the Company continues to apply APB Opinion No. 25 (APB 25) and
related Interpretations in accounting for its option plans. Under SFAS 123, a
fair value method is used to determine compensation cost for stock options or
similar equity instruments. Compensation is measured at the grant date and is
recognized over the service or vesting period. Under APB 25, compensation cost
is the excess, if any, of the quoted market price of the stock at the
measurement date over the amount that must be paid to acquire the stock. The new
standard allows the Company to continue to account for stock-based compensation
under APB 25, with disclosure of the effects of the new standard. The proforma
effect on income as if the Company had adopted SFAS 123 is disclosed in Note 10.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform with the current year presentation. These changes have no effect on
net earnings.
EARNINGS PER SHARE - Earnings per share are based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding, net of common stock held in treasury as follows:
Year Ended October 31,
--------------------------------------------
1999 2000 2001
------------- ------------- -------------
Net income (loss) for earnings
per share computation $ (9,071,000) $ 2,614,000 $ 14,501,000
============= ============= =============
BASIC
Weighted average number of
common shares outstanding
during the year 38,973,908 38,992,323 39,960,972
============= ============= =============
Basic earnings per share $ (0.23) $ 0.07 $ 0.36
============= ============= =============
DILUTED
Weighted average number of common
shares outstanding used in calculating
basic earnings per share 38,973,908 38,992,323 39,960,972
Add additional shares issuable
upon exercise of stock options,
warrants and convertible securities - 851,099 4,209,575
------------- ------------- -------------
Weighted average number of
common shares used in calculating
diluted earnings per share 38,973,908 39,843,422 44,170,547
============= ============= =============
Diluted earnings per share $ (0.23) $ 0.07 $ 0.33
============= ============= =============
F-11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the year ended October 31, 1999, the Company has not included the
effect of assumed conversions and exercises of stock options and warrants since
the effect of such an inclusion would be antidilutive. For the year ended
October 31, 2000, the Company has included 2,571,963 of options and warrants in
the calculation of dilutive earnings per share. Common stock equivalents, which
are exercisable into 4,156,790 shares of common stock at October 31, 2000, have
been excluded because their effect would be antidilutive. For the year ended
October 31, 2001, the Company has included 7,724,350 options and warrants in the
calculation of diluted earnings per share. The Company has excluded 3,483,822
options and warrants in the calculation of diluted earnings per share because
their effect would be antidilutive as of October 31, 2001. However, these
instruments could potentially dilute earnings per share in future years.
NEW ACCOUNTING PRONOUNCEMENTS - During 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standard No. 141
("Business Combinations"), No. 142 ("Goodwill and Other Intangible Assets"), No.
143 ("Accounting for Asset Retirement Obligations"), No. 144 ("Accounting for
the Impairment or Disposal of Long-Lived Assets") which are effective for fiscal
2002. SFAS 141 requires business combinations initiated after June 30, 2001 to
be accounted for using the purchase method of accounting. It also specifies the
types of acquired intangible assets that are required to be recognized and
reported separately from goodwill. SFAS 142 will require that goodwill and
certain intangibles no longer be amortized, but instead tested for impairment at
least annually. SFAS 142 is required to be applied starting with fiscal years
beginning after December 15, 2001, with early application permitted in certain
circumstances. The Company plans to early adopt SFAS 142 in fiscal 2002 and does
not expect any impairment of goodwill upon adoption. Goodwill amortization was
approximately $1,354,000 in fiscal 2001 and approximately $903,000 in fiscal
2000.
NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES
Future openings of imaging center:
- ----------------------------------
In December 2000, the Company entered into a new lease arrangement for
2,400 square feet of additional space in Tarzana, California to open an imaging
center offering MRI, CT and PET services. The annual rent expenditure will be
approximately $66,000 with the lease term expiring in December 2007. The center
opened in January 2002.
In March 2001, the Company entered into a new lease arrangement for
5,787 square feet of property in Burbank, California to open a new center
providing multiple services including a high-field MRI, open MRI, CT, PET,
ultrasound, nuclear medicine and x-ray services. The initial rent expenditure is
approximately $15,000 per month. The center opened in late December 2001.
F-12
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES (Continued)
Sale of imaging center:
- -----------------------
Effective March 1, 2001, the Company's DIS subsidiary sold its Valley
Regional Oncology Center ["VROC"] to Summit Health Enterprises, LLC, an
unaffiliated third party, for $4,000,000 cash and recognized a gain on the sale
of approximately $3,527,000. In addition, the Company invested an additional
$100,000 in the center for which it received an 8.89% interest. For the four
months ended February 28, 2001, the center generated net revenue of
approximately $570,000 and net income of approximately $190,000.
Acquisitions and openings of imaging centers:
- ---------------------------------------------
In November 1999, the Company opened Los Coyotes Imaging in Long Beach,
California, a start-up facility providing MRI, CT, nuclear medicine and
diagnostic x-ray services.
In June 2000, the Company formed SoCal MR Site Management, Inc. and
acquired the operating sites and some of the assets of three hospital-based MRI
facilities; Tarzana MRI, Chino Valley MRI, and San Gabriel Valley MRI, (formerly
sold to an unrelated third party in 1997), for $14.2 million in notes payable.
On August 30, 2000, the Company's subsidiary Radnet Management I, Inc.
acquired the assets of two open MRI centers in San Francisco and Emeryville,
California for $3.3 million in notes payable. In conjunction with the
transaction, the Company closed its other site in San Francisco at 450 Sutter
Street and consolidated its business at the new center.
Effective May 9, 2001, the Company acquired certain assets and related
liabilities of Modesto Imaging Center, Inc. ["Modesto"]. The results of
operations have been included in the consolidated financial statements as of
that date. Modesto provides MRI, CT, ultrasound, mammography and x-ray services.
The aggregate purchase price was $7,918,000, consisting of cash and notes
payable of $6,357,000, assumption of debt totaling $561,000 and contingent
consideration of $1,000,000 placed in an escrow account, payable upon the
Modesto center reaching certain guaranteed net collection levels.
The following summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Property and equipment $ 1,868,000
Goodwill 6,050,000
------------
Total assets acquired 7,918,000
Current liabilities (32,000)
Long-term debt (529,000)
------------
Total liabilities assumed (561,000)
------------
Net assets acquired $ 7,357,000
============
F-13
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES (Continued)
The $6,050,000 of goodwill has been assigned to the acquired imaging
center based on the relative asset values and expected contributions to the
Company. The total goodwill is expected to be deductible for tax purposes.
The following represents the unaudited pro forma results of operations
as if the acquisition had been acquired as of the beginning of the respective
reporting periods presented:
Years ending October 31,
---------------------------------------------------
1999 2000 2001
--------------- --------------- ---------------
Net revenue $ 81,357,000 $ 99,255,000 $ 118,518,000
Net income before extraordinary item (8,709,000) 2,899,000 14,516,000
Net income (7,153,000) 4,411,000 15,070,000
EPS (0.18) 0.11 0.34
Effective June 1, 2001, the Company acquired a portion of the assets
and related liabilities of Sadler Radiology, Inc.. The results of operations
have been included in the consolidated financial statements as of that date.
Sadler Radiology, Inc. is the provider of radiology services in two imaging
centers in Palm Springs and Palm Desert, California. The aggregate purchase
price was $407,000, consisting of a cash purchase price of $31,000 and the
assumption of debt and liabilities totaling $376,000. The purchase price has
been allocated to property and equipment.
As a result of the aforementioned purchases, the Company has expanded
its California market presence and increased its medical contract capacity.
Investment in subsidiary:
- -------------------------
During the year ended October 31, 1999, the Company purchased 390,100
shares of DIS outstanding common stock for approximately $480,000, receiving
390,100 warrants to purchase common stock of the Company at $.25 per share.
During the year ended October 31, 2001, the Company purchased an additional
59,000 shares of DIS outstanding common stock for approximately $30,000
increasing its ownership to 10,237,000 shares, or approximately 91%.
F-14
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation and amortization as
of October 31, 2000 and 2001 are:
2000 2001
-------------- --------------
Land $ 1,764,000 $ 1,764,000
Buildings 2,476,000 2,476,000
Medical equipment 17,784,000 20,965,000
Office equipment, furniture and fixtures 4,965,000 6,879,000
Leasehold improvements 12,950,000 18,173,000
Equipment under capital lease 32,123,000 50,167,000
-------------- --------------
72,062,000 100,424,000
Accumulated depreciation and amortization (27,704,000) (35,056,000)
-------------- --------------
$ 44,358,000 $ 65,368,000
============== ==============
Depreciation and amortization expense on property and equipment for the
year ended October 31, 1999, 2000 and 2001 was approximately $6,680,000,
$7,315,000 and $9,052,000, respectively. Accumulated amortization under capital
leases for the years ended October 31, 2000 and 2001 was approximately
$13,470,000 and $15,197,000, respectively. Amortization expense under capital
leases for the years ended October 31, 1999, 2000 and 2001 was approximately,
$3,000,000, $3,530,000, and $4,216,000, respectively.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of goodwill recorded at cost of $24,250,000
and $30,330,000, less accumulated amortization of $4,912,000 and $6,265,000 for
the years ended October 31, 2000 and 2001, respectively. Amortization expense of
approximately $1,030,000, $903,000 and $1,653,000 was recognized for the years
ended October 31, 1999, 2000 and 2001, respectively.
During the year ended October 31, 2000, the Company recorded goodwill
of $8,242,000 in connection with the acquisition of three hospital-based MRI
facilities in Tarzana, San Gabriel Valley and Chino, California and $1,404,000
in connection with the acquisition of two open MRI facilities in San Francisco
and Emeryville, California. During the year ended October 31, 2001, the Company
recorded goodwill of $6,050,000 in connection with the acquisition of Modesto
Imaging Center and $30,000 in connection with the purchase of an additional
59,000 shares of DIS common stock.
F-15
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INTANGIBLE ASSETS (CONTINUED)
During the year ended October 31, 1999, the Company recorded goodwill
in connection with the acquisition of additional shares of DIS stock of
approximately $478,000, which was written off as an impairment loss.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2000 2001
------------- -------------
Accounts payable $ 7,100,000 $ 7,423,000
Accrued expenses 5,567,000 10,116,000
Accrued professional fees 2,062,000 2,163,000
Accrued loss on legal judgments 575,000 412,000
Other 234,000 1,233,000
------------- -------------
15,538,000 21,347,000
Less long-term portion of accrued
expenses, professional fees,
accrued losses and other (122,000) (1,986,000)
------------- -------------
$ 15,416,000 $ 19,361,000
============= =============
Accrued professional fees consist of outside professional agreements,
which are paid out of net cash collections. The long-term portion relates to the
accounts receivable classified as long-term.
F-16
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES
Notes payable, long-term debt and capital lease obligations at October
31, 2001 and 2000 consists of the following:
2000 2001
-------------- --------------
Revolving lines of credit $ 26,497,000 $ 20,752,000
Note payable bearing interest at the bank's prime rate
plus 1%, due October 2000, collateralized by certain
accounts receivable, subsequently converted to
preferred stock and then converted back into notes
payable 5,494,000 -
Notes payable at interest rates ranging from
6.6% to 11.2%, due through 2007, collateralized by
medical equipment 54,581,000 66,024,000
Note payable bearing interest at 9.5%, due in 2005,
collateralized by real estate 1,510,000 1,701,000
Obligations from a Company acquisition bearing
interest at 8%, due through 2002 481,000 278,000
Obligations under capital leases at interest
rates ranging from 8.9% to 13.6%, due through
2008, collateralized by medical and office equipment 24,662,000 40,986,000
-------------- --------------
113,225,000 129,741,000
Less: current portion (48,184,000) (39,172,000)
-------------- --------------
$ 65,041,000 $ 90,569,000
============== ==============
The Company's working capital needs currently are provided under two
lines of credit. Under one line of credit, the Company may borrow the lesser of
75% to 80% of eligible accounts receivable, the prior four months' cash
collections, or $22,000,000. In any scenario, the Company may borrow up to the
aggregate collection of receivables in the prior four months as long as the
collections in any one month do not decrease by more than 25% from the prior
month. Interest on outstanding borrowings is payable monthly at the greater of
8% or the bank's prime rate plus 2.5%, with a minimum interest paid each month
of $60,000. At October 31, 2001 approximately $18,429,000 was outstanding under
this line and is due December 31, 2003. The lender holds a first lien position
on substantially all of Radnet's assets. The president and C.E.O. of the Company
F-17
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
has personally guaranteed $10,000,000 of the line. The line is further secured
by a $5,000,000 life insurance policy of the president and C.E.O.
Under the second line of credit, the Company may borrow the lesser of
110% of eligible accounts receivable or $5,000,000. Interest on the outstanding
balance is payable monthly at the bank's prime rate plus 1%. At October 31,
2001, approximately $2,323,000 was outstanding on this line. This line of credit
is on a month-to-month basis. This credit line is collateralized by
approximately 80% of the Tower division's eligible accounts receivable. A third
line with the same lender was eliminated during the year ended October 31, 2001
by restructuring two of the lender's existing notes payable with the Company
distributing the combined balances over 72 months. As of October 31, 2000,
approximately $3.6 million was outstanding under this line.
The banks prime rate at October 31, 2001 was 5.5%. The total funds
available for borrowing under the two lines are approximately $6,129,000 at
October 31, 2001. For the year ended October 31, 2000 and 2001, the weighted
average interest rate on short-term borrowings was 11.4% and 9.0%, respectively.
Annual principal maturities of long-term obligations exclusive of
capital leases but including lines of credit as current liabilities, for future
years ending October 31, are:
2002 $ 31,789,000
2003 12,169,000
2004 11,413,000
2005 10,346,000
2006 17,096,000
Thereafter 5,942,000
--------------
$ 88,755,000
==============
F-18
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
The Company leases equipment under capital lease arrangements. Future
minimum lease payments under capital leases as of October 31, 2001 are:
2002 $ 11,000,000
2003 10,825,000
2004 10,041,000
2005 8,417,000
2006 6,255,000
Thereafter 5,598,000
-------------
Total minimum payments 52,136,000
Amount representing interest (11,150,000)
-------------
Present value of net minimum lease payments 40,986,000
Current portion (7,383,000)
-------------
Long-term portion $ 33,603,000
=============
At October 31, 2001, the Company is in default on approximately
$321,000 under various note agreements, pertaining to the acquisition of imaging
centers, for non-payment of principal and interest. These notes have been
classified as current payables.
During the years ended October 31, 1999, 2000 and 2001, the Company
paid off and renegotiated various obligations at discounts resulting in
extraordinary gains of $1,217,000, $20,000 and $117,000, respectively.
NOTE 8 - SUBORDINATED DEBENTURES
In June of 1993, the Company's registration for a total of $25,875,000
of 10% Series A Convertible subordinated debentures due 2003 was declared
effective by the Securities and Exchange Commission. The net proceeds to the
Company were approximately $23,000,000. Costs of $3,000,000 associated with the
original offering are being amortized over ten years to result in a constant
yield. The unamortized portion is classified as other assets. The debentures are
convertible into shares of common stock at any time before maturity into $1,000
principal amounts at a conversion price of $10 per share through June 1999 and
$12 per share thereafter. As debentures are being converted or retired, a
pro-rata share of the offering costs are written-off.
F-19
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - SUBORDINATED DEBENTURES (CONTINUED)
Amortization expense of the offering costs for the years ended October
31, 1999, 2000 and 2001 was $233,000, $230,000 and $202,000, respectively.
Interest expense for the years ended October 31, 1999, 2000 and 2001 was
approximately $2,040,000, $1,984,000 and $1,720,000, respectively. During the
year ended October 31, 1999, debentures totaling $5,000 were converted into 500
shares of common stock. There were no conversions during the years ended October
31, 2000 and 2001.
During the years ended October 31, 1999, 2000 and 2001, the Company
repurchased debentures with face amounts of $676,000, $234,000 and $68,000, for
$337,000, $122,000 and $37,000, respectively, resulting in gains on early
extinguishments of $339,000, $112,000 and $31,000, respectively. During the year
ended October 31, 2000 , the Company exchanged a $893,000 note receivable from a
related party for $2,273,000 in subordinated debentures. The Company recorded a
$1,380,000 extraordinary gain as a result of this transaction. During the year
ended October 31, 2001, the Company exchanged a $634,000 note receivable from a
related party and recorded a $119,000 related party payable for $1,159,000 in
subordinated debentures. The Company recorded a $406,000 extraordinary gain as a
result of this transaction. In connection with these transactions, $35,000,
$76,000 and $23,000 of net offering costs were written-off during the years
ended October 31, 1999, 2000 and 2001, respectively.
NOTE 9 - INCOME TAXES
Income taxes have been recorded under SFAS No. 109, "Accounting for
Income Taxes." Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and operating loss carryforwards.
The components of the income tax provisions are as follows:
1999 2000 2001
------------ ------------ ------------
Current tax provision
Federal $ - $ - $ 100,000
State - - 25,000
------------ ------------ ------------
- - 125,000
Deferred tax benefit - - (5,235,000)
------------ ------------ ------------
$ - $ - $(5,110,000)
============ ============ ============
F-20
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (CONTINUED)
Reconciliation between the effective tax rate and the statutory tax
rates for the years ended October 31, 1999, 2000 and 2001 are as follows:
1999 2000 2001
-------- -------- --------
Federal tax (34.0)% (34.0)% (34.0)%
State franchise tax, net of federal benefit (5.8) (5.8) (5.8)
Change in valuation allowance 39.8 39.8 90.6
Other - - (0.2)
-------- -------- --------
Income tax benefit - % - % 50.6%
======== ======== ========
At October 31, 2000 and 2001, the Company's deferred tax assets are
comprised of the following items:
2000 2001
------------- -------------
DEFERRED TAX ASSETS, current
Net operating loss carryforwards $ - $ 5,235,000
Other 327,000 1,462,000
------------- -------------
327,000 6,697,000
Valuation allowance (327,000) (1,462,000)
------------- -------------
$ - $ 5,235,000
============= =============
DEFERRED TAX ASSETS, noncurrent
Tax basis of intangible assets in excess of book basis $ 9,681,000 $ 8,062,000
Book basis of fixed assets in excess of tax basis (3,654,000) (6,008,000)
Net operating loss carryforwards 46,243,000 39,269,000
------------- -------------
52,270,000 41,323,000
Valuation allowance (52,270,000) (41,323,000)
------------- -------------
$ - $ -
============= =============
The valuation allowance of $52,270,000 and $41,323,000 at October 31,
2000 and 2001, respectively, represents a decrease of $1,377,000 and a
$10,947,000 respectively, over the preceding year.
F-21
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (CONTINUED)
The Company has net operating loss carryforwards of approximately
$102,300,000, which expire as follows:
2008 $ 18,400,000
2009 16,200,000
2010 15,700,000
2011 16,900,000
2012 1,700,000
2013 15,300,000
2014 12,300,000
2015 5,800,000
--------------
Total $ 102,300,000
==============
As of October 31, 2001, $24,700,000 of the Company's federal net
operating loss carryforwards are subject to limitations related to their
utilization under Section 382 of the Internal Revenue Code.
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS
PREFERRED STOCK
The Company has authorized the issuance of 10,000,000 shares of
preferred stock with a par value of $.01 per share. There are no preferred
shares issued or outstanding at October 31, 1999, 2000 or 2001. Shares may be
issued in one or more series. During the year ended October 31, 2001, the
Company issued 5,542,018 preferred shares in settlement of certain debt
obligations and subsequently retired the stock by restructuring existing notes
payable and combining the preferred stock balance due of approximately
$5,542,000 plus accrued interest of approximately $235,000. In conjunction with
this refinancing, the Company issued five-year warrants to purchase 1,000,000
shares of common stock at an exercise price of $1 per share.
F-22
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED)
REDEEMABLE STOCK
In January 1998, the Company entered into a five-year agreement with a
former officer of the Company whereby the Company agreed to purchase up to
600,000 shares of the Company's common stock from the former officer at $.40 per
share, in minimum increments of 100,000 shares, upon his election any time prior
to February 28, 2003. In January 1999, the Company repurchased 200,000 shares
under this agreement. Subsequent to year-end, the Company paid the former
officer $40,000 for his rights to have the Company repurchase the remaining
400,000 shares.
STOCK OPTION INCENTIVE PLANS
The Company has a long-term incentive stock option plan which reserves
2,000,000 shares of common stock. Options granted under the plan are intended to
qualify as incentive stock options under existing tax regulations. In addition,
the Company has issued non-qualified stock options from time to time in
connection with acquisitions and for other purposes and has also issued stock
under the plan. Subsequent to year-end, the Company issued 132,800 shares as a
bonus to 274 employees ($.60 per share public closing price on authorization
date). The following table summarizes the activity for the three years ended
October 31, 2001:
Outstanding Options
----------------------------------
Number Exercise Price
--------------- -----------------
Balance, October 31, 1998 2,330,060 5.04
Granted 500,000 0.15
Canceled or expired (1,368,197) 8.42
------------ ------------
Balance, October 31, 1999 1,461,863 0.21
Granted 500,000 0.40
Canceled or expired (235,000) 0.15
------------ ------------
Balance, October 31, 2000 1,726,863 0.28
Granted 607,000 0.48
Exercised (588,666) 0.15 - 0.25
Canceled or expired (243,197) 0.32 - 0.53
------------ ------------
Balance, October 31, 2001 1,502,000 $ 0.38
============ ============
F-23
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED)
The following summarizes information about stock options outstanding
at October 31, 2001:
Outstanding Options
-----------------------------------------------------------
Range of exercise Number Weighted average remaining Weighted average
prices outstanding contractual life exercise price
- ----------------- ----------- -------------------------- ----------------
$.15 - $.30 395,000 2.22 years $ 0.19
$.31 - $.60 1,007,000 6.37 years $ 0.42
$.61 - $.90 100,000 9.34 years $ 0.72
-----------
1,502,000 5.47 years $ 0.38
===========
Had compensation cost for the Company's options granted been
determined consistent with SFAS 123, the Company's earnings per share would be
affected as follows:
Year Ended October 31,
-----------------------------------------------
1999 2000 2001
------------- ------------ ------------
Net income (loss)
As reported $ (9,071,000) $ 2,614,000 $14,501,000
============= ============ ============
Pro Forma $ (9,134,000) $ 2,454,990 $11,695,749
============= ============ ============
Income (loss) per share (basic and diluted):
As reported $ (.23) $ .07 $ .36
============= ============ ============
Pro Forma $ (.23) $ .06 $ .29
============= ============ ============
The fair value of each option granted is estimated on grant date using
the Black-Scholes option pricing model which takes into account as of the grant
date the exercise price and expected life of the option, the current price of
the underlying stock and its expected volatility, expected dividends on the
stock and the risk-free interest rate for the term of the option. The following
is the average of the data used to calculate the fair value:
Risk-free Expected Expected
October 31, interest rate Expected life volatility dividends
----------- ------------- ------------- ---------- ---------
2001 4.17% 5 years 98.54% N/A
2000 6.60% 5 years 104.60% N/A
1999 5.42% 4 years 134.01% N/A
F-24
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED)
From time to time, the Company has issued warrants under various types
of transactions, including in exchange for outside services and debt financing.
Warrants outstanding at October 31, 2001 expire at various times through
December 2006. All warrants are issued at fair market value. The following table
summarizes the activity in outstanding stock purchase warrants:
Outstanding warrants
----------------------------------
Shares Price range
--------------- -----------------
Balance, October 31, 1998 4,612,000 $0.25 - $0.60
Granted 389,890 0.25
----------- --------------
Balance, October 31, 1999 5,001,890 0.25 - 0.60
Granted - -
----------- --------------
Balance, October 31, 2000 5,001,890 0.25 - 0.60
Granted 6,428,655 0.38 - 1.00
Exercised (920,100) 0.25
Canceled or expired (3,832,560) 0.60
----------- --------------
Balance, October 31, 2001 6,677,885 $0.38 - $1.00
=========== ==============
CAPITAL TRANSACTIONS
During the year ended October 31, 2000, an employee of the Company
exercised his options for 200,000 shares of the Company's common stock of $.15
per share. The Company issued a note receivable in connection with this
purchase. During the year ended October 31, 2001, the employee repaid
approximately $12,000 of the related party receivable.
During the year ended October 31, 1999, debentures totaling $5,000 were
converted into 500 shares of common stock.
During the year ended October 31, 1998, a former officer of the
Company, who had existing options for 200,000 shares of the Company's common
stock, was granted options for an additional 100,000 shares at $.30 per share as
part of his contract buyout and renegotiation. In January 1998, he exercised all
of the remaining options for 300,000 shares of the Company's common stock at a
weighted average price of $.183 per share. In connection with the transaction,
the Company lent the former officer $30,000, with interest at 6.5%, which is
classified as stock subscription receivable on the Company's financial
statements. During the year ended October 31, 1999, the Company repurchased
200,000 shares from the former officer at $.40 per share under a stock
repurchase agreement.
F-25
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of financial instruments as of
October 31, follows:
2000 2001
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Accounts receivable, current $20,365,000 $20,365,000 $28,764,000 $28,764,000
Accounts receivable, long term $ 2,110,000 $ 2,110,000 $ 2,499,000 $ 2,499,000
Due from related party -
long-term $ 156,000 $ 156,000 $ 108,000 $ 108,000
Debt maturing within one year $43,269,000 $43,269,000 $31,789,000 $31,789,000
Long-term debt $45,295,000 $38,274,000 $56,966,000 $51,826,000
Notes payable related parties, $ 2,554,000 $ 2,554,000 $ 119,000 $ 119,000
current
Notes payable related parties, $ - $ - $ 1,330,000 $ 1,179,000
long-term
Subordinated debentures $17,530,000 $10,196,000 $16,303,000 $16,537,000
In assessing the fair value of these financial instruments, the
Company has used a variety of methods and assumptions, which were based on
estimates of market conditions and risks existing at that time. For certain
instruments, including cash and cash equivalents, cash overdraft, current
accounts receivable, due from/to related parties and current and short-term
debt, it was assumed that the carrying amount approximated fair value for the
majority of these instruments because of their short maturities. The fair value
of the long term amounts for accounts receivable, due from related party, notes
payable related parties and debt is based on current rates at which the Company
could borrow funds with similar remaining maturities. The fair value of the
subordinated debentures is the estimated value of debentures available to
repurchase at current market rates over the bond term including an estimated
interest payment stream.
NOTE 12 - RELATED PARTY TRANSACTIONS
The amount due from related parties at October 31, 2000 consists of
short term loans of approximately $433,000 made to an officer of the Company
bearing interest at 8%, notes to a current officer of the Company for $30,000
bearing interest at 7% [classified as Stock Subscription Receivable], and notes
to a prior officer of the Company for $126,000 bearing interest at 6.5%
[including $30,000 classified as Stock Subscription Receivable].
During the year ended October 31, 2001, the following related party
transactions occurred:
The Company made additional loans to an officer of the Company
increasing his loan balance from approximately $433,000 to $635,000 [with
accrued interest]. Effective October 1, 2001, the officer exchanged his $635,000
notes receivable and the Company recorded a related party payable for
approximately $119,000 for the purchase of $1,159,000 of its subordinated
debentures. The Company recorded a $405,000 extraordinary gain as a result of
the transaction.
F-26
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company made short-term loans to another officer of the Company
without interest aggregating approximately $94,000 which are to be repaid within
one year.
The Company forgave approximately $35,000 of notes due from a prior
officer of the Company in consideration of his prior efforts.
A current officer repaid approximately $12,000 of his note receivable to
the Company classified as Stock Subscription Receivable.
The amount due to related parties at October 31, 2000 consists of notes
due to an officer and employee of the Company for the purchase of DIS common
stock in 1996. The notes bear interest at 6.58% paid annually. At October 31,
2000, the officer had outstanding notes payable of approximately $2,449,000 and
the employee had notes payable of approximately $105,000.
During the year ended October 31, 2001, in addition to incurring a
related party payable of approximately $119,000 for the purchase of subordinated
debentures, the Company had additional related party notes payable of
approximately $1,330,000. One-half of the officer's notes payable was
reclassified as Notes and Leases Payable after year-end when it was assigned to
an unrelated third party. The remaining balance, originally due June 2001, was
extended until June 2003 with payments of interest only, at 6.58%, due monthly.
The employee related party payable of $105,000, originally due June 2001, was
extended to June 2004 with interest at 6.58% paid annually.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases various operating facilities and certain
medical equipment under operating leases expiring through 2018. Certain leases
contain renewal options from two to ten years and escalation based primarily on
the consumer price index. Future minimum annual payments under noncancellable
operating leases are as follows:
Year ending October 31, Facilities Equipment Total
----------------------- ------------ ----------- -----------
2002 $ 4,687,000 $ 2,348,000 $ 7,035,000
2003 4,002,000 2,283,000 6,285,000
2004 3,540,000 2,090,000 5,630,000
2005 3,408,000 1,914,000 5,322,000
2006 2,972,000 1,002,000 3,974,000
Thereafter 14,258,000 322,000 14,580,000
------------ ----------- ------------
$ 32,867,000 $ 9,959,000 $ 42,826,000
============ =========== ============
F-27
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
LEASES (CONTINUED) - Total rent expense, including equipment rentals,
for the years ended October 31, 1999, 2000 and 2001 amounted to approximately
$5,945,000, $6,334,000 and $7,344,000, respectively.
SALARIES AND CONSULTING AGREEMENTS - The Company has a variety of
arrangements for payment of professional and employment services. The agreements
provide for the payment of professional fees to physicians under various
arrangements including a percentage of revenue collected from 15% to 20%, fixed
amounts per periods and combinations thereof.
The Company also has employment agreements with officers and key
employees at annual compensation rates ranging from $48,000 to $350,000 and for
periods extending up to five years. Total commitments under the agreements are
approximately $10,556,000 as of October 31, 2001.
The Company renegotiated and bought out the remaining years of an
employment contract with one officer. Terms of the settlement include the
establishment of a legal consulting arrangement which expires February 2003. The
remaining commitment under this agreement is approximately $63,000.
Additionally, the Company was required to repurchase, at the former officer's
option, up to 600,000 shares of Common stock at $.40 per share any time through
February 2003. During the year ended October 31, 1999, the Company repurchased
200,000 shares under this agreement. Subsequent to year-end, the Company paid
$40,000 to this former officer eliminating his option to require the Company to
repurchase the remaining 400,000 shares under his agreement.
PURCHASE COMMITMENT - On February 19, 1999 the Company entered into a
five year purchase agreement with an imaging film provider whereby the Company
must purchase $9,990,000 of film at a rate of approximately $2,000,000 annually
over the term of the agreement.
EQUIPMENT SERVICE CONTRACTS - On March 1, 2000, the Company entered
into an equipment maintenance service contract through October 2005, with GE
Medical Systems to provide maintenance on the majority of its medical equipment
for a fee based upon a percentage of net revenues with minimum aggregate net
revenue requirements. The percent of revenue to be billed ranges from 2.82% to
3.74% and the aggregate minimum net revenue ranges from $85,000,000 to
$125,000,000 during the term of the agreement. The Company has met or exceeded
the minimum required revenue for fiscal 2000 and 2001.
LITIGATION - In the ordinary course of the Company's business from time
to time, it becomes involved in certain legal proceedings, the majority of which
are covered by insurance. Management is not aware of any pending material legal
proceedings.
F-28
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - EMPLOYEE BENEFIT PLAN
The Company has adopted a profit-sharing/savings plan pursuant to
Section 401(k) of the Internal Revenue Code, that covers substantially all
employees. Eligible employees may contribute on a tax deferred basis a
percentage of compensation, up to the maximum allowable under tax law. Employee
contributions vest immediately. The plan does not require a matching
contribution by the Company. There was no expense for the years ended October
31, 1999, 2000 or 2001.
NOTE 15 - MALPRACTICE INSURANCE
The Company and physicians employed by the Company are insured by First
Insurance Funding Corp. of California. The Company's financial obligation is
limited to its premiums for malpractice insurance coverage. First Insurance
Funding Corp. of California provides claims-based malpractice insurance coverage
which covers only asserted malpractice claims within policy limits. The Company
purchases tail insurance coverage when necessary and includes the cost of the
premiums in the year the tail is purchased. Management does not believe there
are material uninsured malpractice costs at October 31, 2001.
NOTE 16 - SUBSEQUENT EVENTS
Effective November 1, 2001, the Company paid $40,000 to a former
officer eliminating his options to require the Company to repurchase 400,000
shares under his separation agreement [stock put classified as Redeemable Stock
on the Company's financial statements].
Effective November 1, 2001, the Company entered into a new building
lease in Indio, California adding a fifth facility to service the Company's
Desert Advanced facility in Palm Springs and Palm Desert, California. The clinic
will only provide x-ray services. The lease term is three years with beginning
monthly rental of approximately $2,000.
Effective November 1, 2001, the Company issued 75,000 additional
warrant shares at $.95 per share expiring on November 1, 2006.
In November 2001, the Company issued 132,800 shares of common stock as
a bonus to 274 employees under the long-term incentive stock option plan ($.60
per share public closing price on the authorization date).
Effective November 26, 2001, the Company entered into a new building
lease in Rancho Bernardo, California, near San Diego, for 9,557 square feet of
space to develop a multi-modality imaging center providing MRI, CT, PET,
mammography, ultrasound and x-ray services. The center, Rancho Bernardo Advanced
Imaging Center, LLC, will be 75%-owned by the Company and 25%-owned by two
physicians who will invest $250,000. The lease term is ten years from the
anticipated opening date and completion of tenant improvements which is expected
to be on or around June 1, 2002. The beginning monthly rental at that time will
be approximately $12,000.
F-29
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - SUBSEQUENT EVENTS (Continued)
Effective January 1, 2002, the Company entered into a capitation
arrangement with Primecare Medical Group for approximately 62,000 lives
primarily benefiting the Company's Temecula Valley Imaging Center ["TVIC"]. The
Company is entering into two new building leases in Sun City [approximately
3,000 square feet] and Lake Elsinore [approximately 1,000 square feet],
California, north of Temecula, which will provide x-ray services to support the
new contract.
NOTE 17 - LIQUIDITY
The accompanying financial statements have been prepared in conformity
with generally accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. As of October 31,
2001, the Company has a deficiency in equity of $45,642,000 compared to
$60,913,000 as of October 31, 2000. Working capital deficiency of $26,987,000 as
of October 31, 2001, has improved by $17,601,000, from the deficiency of
$44,588,000 as of October 31, 2000. Over the past several years, management has
been addressing the issues that have lead to these deficiencies, and the results
of management's plans and efforts have been positive as indicated by
improvements in operating income and profitability for the past two years.
However, continued effort is planned in the future to allow the Company to
continue to operate profitably. Such actions and plans include:
o Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. In fiscal 2001, the Company
acquired an imaging center in Modesto. In December 2001, the Company
opened a new center in Burbank. The centers have experienced favorable
performance in their initial months of operations.
o Increase revenue by negotiating new and existing capitation and managed
care contracts for additional services and more favorable terms. During
the year ended October 31, 2000, the Company renegotiated many of its
existing capitation contracts increasing its monthly rates. In January
2001, the Company successfully renegotiated an additional capitation
contract for its Long Beach facilities increasing the contracted
reimbursement approximately 26%.
o Increase net revenue and decrease operating losses by eliminating poor
performing capitation and managed care contracts where reimbursement
falls short of the Company's costs. In January 2001, the Company
stopped providing services for one capitation contract which improved
profitability in the Company's Tower facility.
o Consolidate under-performing facilities to reduce operating cost
duplication and improve operating income. In January 2001, the Company
consolidated its Auburn facility with its Scripps site in Sacramento.
F-30
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17 - LIQUIDITY (CONTINUED)
o Continue to evaluate all facilities' operations and trim excess
operating and general and administrative costs where it is feasible to
do so.
o Continue to selectively acquire new medical equipment and replace old
and obsolete equipment in order to increase service volume and
throughput at many facilities. During the last few fiscal years, the
Company has had continued success in these endeavors with significant
increases in volume at most of its facilities.
o Continue to work with lessors and lenders to extend terms of leases and
financing to accommodate cash flow requirements for ongoing agreements
and upon the expiration of leases and notes. The Company has
demonstrated continued success in renegotiation of many of its existing
notes payable and capital lease obligations by extending payment terms,
reducing interest rates, reducing or eliminating monthly payments and
creating long-term balloon payments. During fiscal 2001, one of the
Company's major lenders agreed to convert $5,542,000 of the current
debt into a new series of notes by restructuring existing notes
payable, increasing monthly payments and extending terms. In addition,
the Company eliminated a second line of credit with DVI Business Credit
by consolidating its balances into two existing notes and increasing
credit terms, thus improving current liabilities and working capital.
The Company's long-term relationships with its lenders and their
continued confidence in their extensions of credit is critical to the
Company's success.
o Continue to settle historical notes payable, subordinated bond
debentures and other debt at discounts.
o Depending on price, market circumstances and strategic buyers, the
Company may look to liquidate non core assets. In March 2001, the
Company sold its only radiation therapy center ("VROC") for $4,000,000,
resulting in a gain of approximately $3,527,000.
Notwithstanding the continued (though improving) working capital
deficiency, substantial doubt about the entity's ability to continue as a going
concern is alleviated by mitigating factors. Those mitigating factors include
the aforementioned actions and plans by management combined with the increasing
positive cash flow from operations, unused availability of the Company's working
capital lines of credit, and the willingness of existing lenders to offer
alternative debt financing and payment plans.
F-31
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
Our report on the consolidated financial statements of Primedex Health Systems,
Inc. and its affiliates, as of October 31, 2001 and 2000 and for the three years
ended October 31, 2001, is included on page F-1 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
accompanying financial statements Schedule II - Valuation and Qualifying
Accounts for the years ended October 31, 2001, 2000, and 1999. In our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
MOSS ADAMS LLP
Los Angeles, California
January 18, 2002
S-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Additions
------------
Beginning of Charged from Reserves Balance at End
Year Against Income (a) of Year
------------ ------------ ------------ ------------
YEAR ENDED OCTOBER 31, 2001:
Accounts receivable allowances - current $ 29,100,000 $163,004,000 $142,226,000 $ 49,878,000
============ ============ ============ ============
Accounts receivable allowances - noncurrent $ 3,014,000 $ 14,162,000 $ 12,843,000 $ 4,333,000
============ ============ ============ ============
Goodwill amortization $ 4,912,000 $ 1,353,000 $ - $ 6,265,000
============ ============ ============ ============
YEAR ENDED OCTOBER 31, 2000:
Accounts receivable allowances - current $ 25,305,000 $130,678,000 $126,883,000 $ 29,100,000
============ ============ ============ ============
Accounts receivable allowances - noncurrent $ 4,795,000 $ 13,536,000 $ 15,317,000 $ 3,014,000
============ ============ ============ ============
Goodwill amortization $ 4,009,000 $ 903,000 $ - $ 4,912,000
============ ============ ============ ============
YEAR ENDED OCTOBER 31, 1999:
Accounts receivable allowances - current $ 19,981,000 $ 85,753,000 $ 80,429,000 $ 25,305,000
============ ============ ============ ============
Accounts receivable allowances - noncurrent $ 4,810,000 $ 15,618,000 $ 15,633,000 $ 4,795,000
============ ============ ============ ============
Goodwill amortization $ 3,290,000 $ 719,000 $ - $ 4,009,000
============ ============ ============ ============
(a) Deductions include sales and divestitures
S-2
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to
each of the directors and those executive officers of the Company performing a
policy-making function for the Company as of February 1, 2002:
Name Age Director or Officer Since Position with Company
- ---- --- ------------------------- ---------------------
Howard G. Berger, M.D.* 56 1992 President, Treasurer, Chief Executive
and Financial Officer, and Director
Norman R. Hames 44 1996 Vice President, Secretary, Chief
Operating Officer and Director
John V. Crues, III, M.D.* 52 2000 Vice President and Director
Michael J. Krane, M.D. 57 1992 Vice President, Director of Medical
Operations
Jeffrey L. Linden 59 2001 Vice President, General Counsel
- --------
*Member of the Stock Option Committee
The following is a brief account of the business experience of each PHS
director and executive officer during the past five years.
HOWARD G. BERGER, M.D. is the President and Chief Executive Officer of
the Company. Dr. Berger is the 99% owner of Beverly Radiology Medical Group
("BRMG") which supplies the medical services at a number of the Company's
imaging centers. Dr. Berger has been principally engaged since 1987 in the same
capacities for the Company and its predecessor entities. (See Item 13.)
NORMAN R. HAMES was a founder of Diagnostic Imaging Services, Inc. and
has since 1986, served as the president and a director of that entity. Mr. Hames
has been the chief operating officer of the Company since 1996.
JOHN V. CRUES, III, M.D. has, since 1996, served as medical director of
the Company and of BRMG and has been a medical doctor since 1982.
MICHAEL J. KRANE, M.D. is the vice president and director of medical
operations at RadNet. Dr. Krane has been principally engaged since 1987 in the
same capacities for the Company and its predecessor entities.
JEFFREY L. LINDEN joined the Company in 2001 as its vice president and
general counsel. He is also associated with Cohen & Lord, a professional
corporation, outside general counsel to the Company. Prior to joining the
Company, Mr. Linden had been engaged in the private practice of law for in
excess of 25 years.
None of the Company's directors serve as directors of any other
corporation with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934 or subject to the requirements of Section 15(d)
of that Act. Furthermore, none of the events described in Item 401(f) of
Regulation S-K involving a director or an executive officer of the Company
occurred during the past five years.
26
The officers are elected annually and serve at the discretion of the
Board of Directors. There are no family relationships among any of the officers
and directors. During the fiscal year ended October 31, 2001, while the Board of
Directors held numerous meetings, they took board action by unanimous written
consent, which was done on eight occasions. All directors participated in all
such action.
At present the Board of Directors acts as an Audit Committee, which
reviews the results and scope of the audit and other services provided by the
Company's independent auditors, and as a Compensation Committee, which
determines salaries and incentive compensation for employees of and consultants
to the Company. The Company intends for such committees to be composed of
independent directors at such time as it is able to locate qualified individuals
willing and able to serve on the Company's Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange
Act") requires the Company's directors and officers and persons who own more
than 10% of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Directors and officers and greater than 10% stockholders are
required by SEC regulation to furnish the Company with copies of the reports
they file. Based solely on the review of the copies of such reports and written
representations from certain persons that certain reports were not required to
be filed by such persons, the Company believes that all its directors, officers
and greater than 10% beneficial owners complied with all filing requirements
applicable to them with respect to transactions for the period November 1, 2000
through October 31, 2001, except that Dr. Berger failed to file timely a
Statement of Change in Beneficial Ownership on Form 4 with regard to a transfer
of the Company's convertible subordinated debentures. When it was brought to his
attention Dr. Berger promptly filed the appropriate ownership form, disclosing
the transaction.
27
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual,
long-term and all other compensation for services rendered in all capacities to
the Company and its subsidiaries for the years ended October 31, 2001, 2000 and
1999, of (i) the person who served as the Company's chief executive officer
during the year ended October 31, 2001, and (ii) the four most highly
compensated executive officers (other than the chief executive officer) of the
Company serving as executive officers at October 31, 2001 ("Other Executive
Officers"), and whose aggregate cash compensation exceeded $100,000 for the year
ended October 31, 2001 (collectively, "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Other Securities Restricted
Name and Year Ended Annual Underlying Stock LTIP All Other
Principal Position 10/31 Salary($) Bonus($) Comp.($) (1) Options (#) Awards($) Pay-outs($) Comp($)
- ------------------ ----- --------- -------- ------------ ----------- --------- ----------- -------
Howard G. Berger, M.D. 2001 $ 75,000(2) -- -- -- -- -- --
Chief Executive Officer 2000 $ 75,000(3) -- -- -- -- -- --
1999 $ 75,000(3) -- -- -- -- -- --
Norman R. Hames 2001 $ 154,875 -- -- 3,000,000 -- -- --
Vice President, Secretary 2000 $ 150,000 -- -- -- -- -- --
Chief Operating Officer 1999 $ 150,000 -- -- -- -- -- --
Michael J. Krane, M.D. 2001 $ 100,000(4) -- -- -- -- -- --
Vice President 2000 $ 100,000(4) -- -- -- -- -- --
1999 $ 100,000(4) -- -- -- -- -- --
John V. Crues, III, M.D. 2001 $ 150,000(4) -- -- -- -- -- --
Vice President 2000 $ 145,000(5) -- -- 500,000 -- -- --
1999 $ 125,000(6) -- -- 500,000 -- -- --
Jeffrey L. Linden 2001 $ 149,369(7) -- -- 1,075,000 -- -- --
Vice President and
General Counsel
(1) The dollar value of perquisites and other personal benefits, if any, for
each of the named executive officers was less than the reporting thresholds
established by the Securities and Exchange Commission.
(2) Does not include $130,000 received from Beverly Radiology Medical Group (see
"Employment Contracts").
(3) Does not include $300,000 received from Beverly Radiology Medical Group (see
"Employment Contracts").
(4) Does not include $150,000 received from Beverly Radiology Medical Group.
(5) Does not include $145,000 received from Beverly Radiology Medical Group.
(6) Does not include $125,000 received from Beverly Radiology Medical Group.
(7) On June 1, 2001, Mr. Linden became the vice president and general counsel of
the Company. Cohen & Lord, a professional corporation, a law firm with which Mr.
Linden is associated, received $497,000 in fees from the Company during the
fiscal year ended October 31, 2001. Mr. Linden has specifically waived any
interest in Company fees since becoming an officer of the Company.
28
COMPENSATION PURSUANT TO STOCK OPTIONS
The following table sets forth information on option grants in fiscal
2001 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Number of Percent of Total Exercise or Assumed Annual Rates of
Shares Underlying Options Granted to Base Price Expiration Stock Price Appreciation
Name Options Granted Employees in 2001(1) Per Share Date for Option Term(2)
- ---- ----------------- ------------------- ----------- ---------- -----------------------------
5% 10%
-------- --------
Jeffrey L. Linden 75,000 12% $.47 3/16/11 $ 20,250 $ 56,250
- -----------------
(1) The option listed was granted pursuant to the 2000 Long-Term Incentive Plan
with the exercise price at the market price when granted (the closing price
reported on the Over-the-Counter Bulletin Board Market). The option vested
immediately.
(2) Potential realizable value is determined by taking the exercise price per
share and applying the stated annual appreciation rate compounded annually for
the remaining term of the option (ten years), subtracting the exercise price per
share at the end of the period and multiplying the remaining number by the
number of options granted. Actual gains, if any, on stock option exercises and
the Company's Common Stock holdings are dependent on the future performance of
the Common Stock and overall stock market conditions..
On April 16, 2001, in connection with his entry into a five year
employment agreement to serve as the Company's vice president and general
counsel, the Company issued to Mr. Linden a five year warrant to purchase
1,000,000 shares of the Company's Common Stock at an exercise price of $.43 per
share, which was the fair market value (the closing price reported on the
Over-the Counter Bulletin Board Market) of the Common Stock on such date.
On May 1, 2001, in connection with his entry into a three year employment
agreement to serve as the Company's vice president and chief operating officer
the Company issued to Mr. Hames a five year warrant to purchase 3,000,000 shares
of the Company's Common Stock at an exercise price of $.55 per share, which was
the fair market value (the closing price reported on the Over the Counter
Bulletin Board Market) of the Common Stock on such date.
29
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table provides information on option exercises in fiscal
2001 by the Named Executive Officers and the value of such officer's unexercised
options at October 31, 2001:
Number of Shares Value of
Shares Underlying Unexercised Unexercised In-the
Aquired on Value Options at Money Options at
Name Exercise(#) Realized($) Fiscal Year End(#) Fiscal Year End($)(1)
- ---- ----------- ----------- ------------------ ---------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Norman R. Hames -- -- 3,000,000(2) 0 $1,200,000 0
John V. Crues, III, M.D. -- -- 800,000 0 $ 515,000 0
Jeffrey L. Linden -- -- 1,367,365(3) 0 $ 682,362 0
- ----------------------
(1) Based on the closing price reported on the Over-the-Counter Bulletin Board
Market for the Common Stock on that date, $.95 per share.
(2) Represents warrant issued to Mr. Hames.
(3) Includes warrants issued to Mr. Linden.
EMPLOYMENT CONTRACTS
As of January 1, 1994, Beverly Radiology Medical Group entered
into an eight year Management Consulting Agreement with Howard G. Berger, M.D.
whereby Dr. Berger agreed to serve as the chief executive for the partnership
entities for $300,000 per year. During fiscal 2001, Dr. Berger agreed to receive
only $130,000.
John V. Crues, III, M.D. has a renewable one year employment
agreement with the Company and with Beverly Radiology Medical Group which began
in 1996 and require him to devote one-half of his time to each entity in
exchange for annual combined remuneration of $300,000 in fiscal 2001 and
$350,000 in fiscal 2002.
On April 16, 2001, the Company entered into a five year employment
agreement with Jeffrey L. Linden whereby Mr. Linden became vice president and
general counsel. The agreement provides for annual compensation of $350,000,
together with a five year warrant to purchase 1,000,000 shares of the Company's
Common Stock at a price of $0.43 per share (the closing price reported on the
Over-the-Counter Bulletin Board Market on the date the agreement was executed).
On May 1, 2001, the Company entered into a three year employment
agreement with Norman R. Hames. Pursuant to the agreement Mr. Hames agreed to
continue his employment with the Company as its vice president and chief
operating officer. Pursuant to the agreement Mr. Hames receives annual
compensation of $225,000. Additionally, in consideration of his entry into the
agreement Mr. Hames received a five year warrant to purchase 3,000,000 shares of
the Company's Common Stock at a price of $0.55 per share (the closing price
reported on the Over-the-Counter Bulletin Board Market on the date the agreement
was executed). The Company also agreed to provide a bonus to Mr. Hames of $0.20
per share upon exercise of the warrant up to a maximum of $600,000.
30
STOCK PLANS
The Company has two stock incentive plans. The 1992 Incentive
Stock Option Plan under which no further options will be issued and the 2000
Long-Term Incentive Plan pursuant to which 2,000,000 shares of Common Stock have
been reserved for issuance. The material features of the 2000 Plan are as
follows:
ADMINISTRATION
The Plan is presently administered by the Board of Directors, but upon
the Company locating non-employee directors who have the requisite
qualifications will then be administered by a committee appointed by the Board
which will consist of two or more non-employee Directors (the "Compensation
Committee"). Subject to the terms of the Plan, the Board (and the Committee, if
established) has full authority to administer the Plan in all respects,
including: (i) selecting the individuals who are to receive Awards under the
Plan; (ii) determining the specific form of any Award; and (iii) setting the
specific terms and conditions of each Award. The Company's senior legal and
human resources representatives are also authorized to take ministerial actions
as necessary to implement the Plan and Awards issued under the Plan.
ELIGIBILITY
Employees, directors and other individuals who provide services to the
Company, its affiliates and subsidiaries who, in the opinion of the Board (or
its appointed Committee), are in a position to make a significant contribution
to the success of the Company, its affiliates and subsidiaries are eligible for
Awards under the Incentive Plan.
AMOUNT OF AWARDS
The value of shares or other Awards to be granted to any recipient
under the Incentive Plan are not presently determinable. However, the Plan
restricts the number of shares and the value of Awards not based on shares which
may be granted to any individual during a calendar year or performance period.
In order to facilitate the Company's compliance with Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), which deals with the
deductibility of compensation for any of the chief executive officer and the
four other most highly-paid executive officers, the Plan limits to 500,000 the
number of shares for which options, stock appreciation rights or other stock
Awards may be granted to an individual in a calendar year and limits to
$1,000,000 the value of non-stock-based Awards that may be paid to an individual
with respect to a performance period. These restrictions were adopted by the
Board of Directors as a means of complying with Code section 162(m) and are not
indicative of historical or contemplated Awards made or to be made to any
individual under the Plan.
STOCK OPTIONS
The Plan authorizes the grant of options to purchase shares of common
stock, including options to employees intended to qualify as incentive stock
options within the meaning of Section 422 of the Code, as well as non-statutory
options. The term of each option will not exceed ten years and each option will
be exercisable at a price per share not less than 100% of the fair market value
of a share of common stock on the date of the grant. Generally, optionees will
pay the exercise price of an option in cash or by check, although the Board (and
the Committee, if established) may permit other forms of payment including
payment through the delivery of shares of common stock. Options granted under
the Plan are generally not transferable (except at death or as gifts to certain
Family Members (as defined in the Plan)). At the time of grant or thereafter,
the Board (and the Committee, if established) may determine the conditions under
which stock options vest and remain exercisable.
31
Unless otherwise determined by the Board (and the Committee, if
established), unexercised options will terminate if the holder ceases for any
reason to be associated with the Company, its affiliates and subsidiaries.
Options generally remain exercisable for a specified period following
termination for reasons other than for Cause (as defined in the Plan),
particularly in circumstances of death, Disability and Retirement (as defined in
the Plan). In the event of a Change in Control or Covered Transaction (as
defined in the Incentive Plan) of the Company, options become immediately
exercisable and/or are converted into options for securities of the surviving
party as determined by the Board (and the Committee, if established).
OTHER AWARDS
The Board (and the Committee, if established) may grant stock
appreciation rights which pay, in cash or common stock, an amount generally
equal to the difference between the fair market values of the common stock at
the time of exercise of the right and at the time of grant of the right. In
addition, the Board (and the Committee, if established) may grant Awards of
shares of common stock at a purchase price less than fair market value at the
date of issuance, including zero. A recipient's right to retain these shares may
be subject to conditions established by the Board (and the Committee, if
established), if any, such as the performance of services for a specified period
or the achievement of individual or Company performance targets. The Board (and
the Committee, if established) may also issue shares of common stock or
authorize cash or other payments under the Plan in recognition of the
achievement of certain performance objectives or in connection with annual bonus
arrangements.
PERFORMANCE CRITERIA
The Board (and the Committee, if established) may condition the
exercisability, vesting or full enjoyment of an Award on specified Performance
Criteria. For purposes of Performance Awards (as defined in the Plan) that are
intended to qualify for the performance-based compensation exception under Code
Section 162(m), Performance Criteria means an objectively determinable measure
of performance relating to any of the following as specified by the Board (and
the Committee, if established) (determined either on a consolidated basis or, as
the context permits, on a divisional, subsidiary, line of business, project or
geographical basis or in combinations thereof): (i) sales; revenues; assets;
liabilities; costs; expenses; earnings before or after deduction for all or any
portion of interest, taxes, depreciation, amortization or other items, whether
or not on a continuing operations or an aggregate or per share basis; return on
equity, investment, capital or assets; one or more operating ratios; borrowing
levels, leverage ratios or credit rating; market share; capital expenditures;
cash flow; working capital requirements; stock price; stockholder return; sales,
contribution or gross margin, of particular products or services; particular
operating or financial ratios; customer acquisition, expansion and retention; or
any combination of the foregoing; or (ii) acquisitions and divestitures (in
whole or in part); joint ventures and strategic alliances; spin-offs, split-ups
and the like; reorganizations; recapitalizations, restructurings, financings
(issuance of debt or equity) and refinancings; transactions that would
constitute a change of control; or any combination of the foregoing. Performance
Criteria measures and targets determined by the Board (and the Committee, if
established) need not be based upon an increase, a positive or improved result
or avoidance of loss.
32
AMENDMENTS
The Board (and the Committee, if established) may amend the Plan
or any outstanding Award for any purpose permitted by law, or may at any time
terminate the Plan as to future grants of Awards. The Board (and the Committee,
if established) may not, however, increase the maximum number of shares of
common stock issuable under the Plan or change the description of the
individuals eligible to receive Awards. In addition, no termination of or
amendment to the Plan may adversely affect the rights of a Participant with
respect to any Award previously granted under the Plan without the Participant's
consent, unless the Compensation Committee expressly reserves the right to do so
in writing at the time the Award is made. To the extent the Board (and the
Committee, if established) desires the Plan to qualify under the Code, certain
amendments may require shareholder approval.
DIRECTOR COMPENSATION
Directors do not receive a fee for their services as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2000 all executive compensation has been determined
by the three member board of directors of PHS, Howard G. Berger, M.D., Norman R.
Hames and John V. Crues, III, M.D. In addition, no individual who served as an
executive officer of the Company during fiscal 2001, served during fiscal 2001
on the board of directors or compensation committee of another entity where an
executive officer of the other entity also served on the board of directors of
the Company.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of February 1, 2002, by
(i) each holder known by the Company to beneficially own more than five percent
of the outstanding Common Stock, (ii) each of the Company's directors and
executive officers [including officers listed in the Summary Compensation Table]
as a group. The percentages set forth in the table have been calculated on the
basis of treating as outstanding, for purposes of computing the percentage
ownership of a particular holder, all shares of PHS Common Stock outstanding at
such date and all shares of Common Stock purchasable upon exercise of options
and warrants owned by such holder which are exercisable at or within 60 days
after such date.
Name of Shares of Common Stock
Beneficial Owner Beneficially Owned(1) Percent of Class
- ---------------- --------------------- ----------------
Howard G. Berger, M.D.* 14,990,128(2) 33.2%
John V. Crues, III, M.D. * 1,050,000 (3) 2.3%
Norman R. Hames* 3,000,000(4) 6.6%
Michael J. Krane, M.D. * 2,216,228 4.9%
Jeffrey L. Linden* 1,367,365(5) 3.0%
All directors and executive officers of
the Company as a group [five persons] 22,623,721(6) 50.0%
- -----------
*The address of all of the Company's officers and directors is c/o
the Company, 1516 Cotner Avenue, Los Angeles, California 90025.
(1) Subject to applicable community property statutes and except as
otherwise noted, each holder named in the table has sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned.
(2) Includes 23,900 shares issuable upon conversion of the Company's
outstanding convertible debentures convertible at $10 per share and 2,500,000
shares subject to a five year warrant exercisable at $1.09 per share issued to
Dr. Berger as a nominee to be transferred to key members of management as
incentive compensation as recommended by Dr. Berger and approved by the Board,
as to which Dr. Berger disclaims any beneficial ownership..
(3) Includes options for 300,000 shares exercisable at $.15 per share
and for 500,000 shares exercisable at $.40 per share.
(4) Represents warrant exercisable at $.55 per share.
(5) Represents options and warrants exercisable at prices between $.30
and $.60 per share.
(6) See the above footnotes. Includes 12,932,456 shares owned of record
and 7,691,265 shares issuable upon exercise of presently exercisable options,
warrants and convertible debentures.
As a result of his stock ownership and his positions as president and a
director of the Company, Howard G. Berger, M.D. may be deemed to be a
controlling person of the Company.
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Howard G. Berger, M.D. [see "Items 10 and 12"] is the 99% owner of
Beverly Radiology Medical Group, Inc. and Pronet Imaging Medical Group, Inc.,
who together have formed the partnership known as Beverly Radiology Medical
Group, which has executed a Management and Services Agreement with RadNet and
DIS pursuant to which it supplies the professional medical services at most of
the Company's imaging centers [see "Item 1] through 2002. In April 1996, the
Company renegotiated the Agreement with BRMG whereby the management fees paid to
the Company by BRMG were increased from 79% of collections to 81% in
consideration of the Company's payment to BRMG of $1,100,000. The amount paid
was determined based upon the discounted value of the estimated additional
benefit to the Company over the remaining term of the agreement of the increased
percentage to be received by the Company. On January 1, 2000, the fees paid to
the Company were reduced to 74% in consideration of BRMG assuming economic
responsibility for the technicians employed at the various centers. In fiscal
2001, Dr. Berger was paid $130,000 and Dr. Krane was paid $150,000 by BRMG.
At October 31, 1995, Howard G. Berger and Michael J. Krane were each
indebted to PHS in the amount of $1,500,000 based on loans extended to Drs.
Berger and Krane at the time of the Company's acquisition of RadNet in June
1992. In April 1996, Dr. Krane discharged his obligation by paying the Company
$1,400,000 and agreeing to renegotiate his employment contract with the Company
to provide for reduced compensation and a reduced time commitment. Dr. Berger,
in August 1996, paid $500,000 against his obligation. The note had been extended
to February 28, 2002 but was discharged as of October 2000, as a result of Dr.
Berger delivering to the Company $2,273,000 face amount of the Company's 10%
Series A Convertible Subordinated Debentures then having an estimated market
value of $1,000,000. During the year ended October 31, 2001, Dr, Berger
exchanged short-term loans of approximately $635,000 and the Company recorded a
related party payable for approximately $119,000 for the purchase of an
additional $1,159,000 of its subordinated debentures from Dr. Berger.
On August 1, 1996, the Company acquired from Norman Hames, [not then an
officer or director of the Company] all of his common stock and warrants to
purchase shares of common stock of Diagnostic Imaging Services, Inc., a Delaware
corporation ("DIS") which then represented 21.6% of the outstanding shares of
that entity in exchange for five year warrants to purchase 2,913,550 shares of
the Company's common stock at $.60 per share as well as the Company's promissory
note, payable interest only annually at 6.58% for $2,448,862 and due June 15,
2001. At October 31, 2001, the note was renegotiated so as to now be due in June
2003. At October 31, 2001, the Company was indebted on account of said note in
the amount of $1,225,000. The warrant expired unexercised.
At October 31, 2001, the Company had loaned to Norman R. Hames $93,750
repayable in one year.
At October 31, 2001, the Company had loaned to John V. Crues, III, M.D.
$18,000 which is repayable May 3, 2002, together with interest at 7% per annum.
At October 31, 2001, the Company was indebted to Jeffrey L. Linden in
the amount of $104,992 in connection with the Company's acquisition of his
interest in DIS. The obligation incurs interest at the rate of 6.58% per annum
and is due June 30, 2004. In the acquisition transaction the Company issued to
Mr. Linden its warrants to purchase 197,365 shares of Common Stock at a price of
$.60 per share expiring June 30, 2004.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS - The following financial statements are filed
herewith:
Page No.
--------
Independent Auditor's Report....................................................................... F-1
Consolidated Balance Sheets........................................................................ F-2
Consolidated Statements of Operations.............................................................. F-3
Consolidated Statements of Stockholders' Deficit................................................... F-4
Consolidated Statements of Cash Flows.............................................................. F-5 to F-7
Notes to Consolidated Financial Statements......................................................... F-8 to F-31
Schedules - The Following financial statement schedules are filed herewith:
Independent Auditor's Report on Supplemental Schedule.............................................. S-1
Schedule II - Valuation and Qualifying Accounts.................................................... S-2
All other schedules are omitted because they are not applicable or the required information is shown in
the consolidated financial statements or notes thereto.
(b) EXHIBITS - The following exhibits are filed herewith or incorporated by reference herein:
Incorporated by
Exhibit No. Description of Exhibit Reference to
- ----------- ---------------------- ------------
3.1.1 Certificate of Incorporation as amended (A)
3.1.2 November 17, 1992 amendment to the Certificate of Incorporation (A)
3.1.3 December 27, 2000 amendment to the Certificate of Incorporation (H)
3.2 By-laws
4.1 Form of Common Stock Certificate (AA)
4.2 Form of Indenture between Registrant and American Stock Transfer
and Trust Company as Incorporated by Indenture Trustee with respect
to the 10% Series A Convertible Subordinated Debentures due 2003 (B)
4.3 Form of 10% Series A Convertible Subordinated Debenture Due 2003
[Included in Exhibit 4.2] (B)
10.1 Employment Agreement dated as of June 12, 1992 between RadNet
and Howard G. Berger. [Dr. Krane executed a substantially
identical employment agreement with New RadNet on said date.] (C)
10.2 Separation Agreement dated January 31, 1995 between PHS and CareAd (D)
10.3 Separation Agreement dated April 20, 1995 between PHS and CareAd (E)
10.4 Stock Purchase Agreement made as of June 2, 1995 among PHS,
CareAd, Howard G. Berger and Robert E. Brennan (E)
36
10.5 Stock Purchase Agreement dated as of November 14, 1995 among
PHS, RadNet Managed Imaging Services, Inc. ["RMIS"], Future
Diagnostics, Inc. ["FDI"] and the shareholders of FDI relating to the
purchase by RMIS of all of the outstanding stock of FDI (F)
10.6 Securities Purchase Agreement dated March 22, 1996, between the
Company and Diagnostic Imaging Services, Inc. (F)
10.7 Stockholders Agreement by and among the Company, Diagnostic
Imaging Services, Inc. and Norman Hames (F)
10.8 Securities Purchase Agreement dated June 18, 1996 between the
Company and Norman Hames (F)
10.9 Stock Purchase Agreement dated September 3, 1997 between the
Company and Preferred Health Management, Inc. whereby the
Company sold its Future Diagnostics, Inc. subsidiary (G)
10.10 DVI Securities Purchase Agreement (H)
10.11 General Electric Note Purchase Agreement (H)
10.12 Securities Purchase Agreement between the Company and
Howard G. Berger, M.D. (H)
10.13 2000 Long-Term Incentive Plan (I)
10.14 Employment Agreement dated April 16, 2001, with Jeffrey L. Linden (J)
10.15 Employment Agreement with Norman R. Hames dated May 1, 2001 (J)
- ------------------
(A) Incorporated by reference to exhibit filed with PHS' Registration
Statement on Form S-1 [File No. 33-51870].
(AA) Incorporated by reference to exhibit filed with PHS' Registration
Statement on Form S-3 [File 33-73150].
(B) Incorporated by reference to exhibit filed with PHS' Registration
Statement on Form S-3 [File No. 33-59888].
(C) Incorporated by reference to exhibit filed in an amendment to Form
8-K report for June 12, 1992.
(D) Incorporated by reference to exhibit filed with PHS' annual report
on Form 10-K for the year ended October 31, 1994.
(E) Incorporated by reference to exhibit filed with PHS' Form 8-K
report for June 5, 1995.
(F) Incorporated by reference to exhibit filed with Form 10-K for the
year ended October 31, 1996.
(G) Incorporated by reference to exhibit filed with Form 8-K report for
September 8, 1997.
(H) Incorporated by reference to exhibit filed with the Form 10-K for
the year ended October 31, 2000.
(I) Incorporated by reference to exhibit filed with PHS' Form 10-Q for
the quarter ended January 31, 2000.
(J) Filed herewith.
37
21 Subsidiaries PHS % Ownership State of Incorporation
------------ --------------- ----------------------
RadNet Management, Inc. 100% California
RadNet Managed Imaging Services, Inc. 100% California
Diagnostic Imaging Services, Inc. 90% Delaware
Primedex Corporation 100% California
Radnet Heartcheck Management, Inc. 100% California
Radnet Management I, Inc. 100% California
Radnet Management II, Inc. 100% California
Radnet Sub, Inc. 100% California
SoCal MR Site Management, Inc. 100% California
Burbank Advanced Imaging Center, LLC 75% California
23 Consent of Independent Public Accountants, filed herewith.
(c) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the
quarter ended October 31, 2001, except the report filed for the event of
September 21, 2001 whereby it was reported that the Company's primarily lender
had agreed to surrender its 5,542,018 shares of the Company's 5% non-voting
convertible preferred stock (convertible on a share for share basis to common
stock with a warrant attached) originally issued in cancellation of $5,542,018
of debt in connection with a restructuring of the Company's outstanding debt.
The restructuring increased debt by $5,778,000 while also extending its payment
so as not to negatively impact cash flow as well as making available an
additional $2,000,000 of financing. The Company granted the lender a five year
warrant to purchase 1,000,000 shares of Common Stock at a price of one dollar
($1.00) per share in connection with the restructuring.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRIMEDEX HEALTH SYSTEMS, INC.
Date: February 12, 2002 /s/ Howard G. Berger
-----------------------------------------
Howard G. Berger, M.D., President,
Treasurer and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By /s/ Howard G. Berger
------------------------------------------
Howard G. Berger, M.D., Director
Date: February 12, 2002
By /s/ John V. Crues
------------------------------------------
John V. Crues, III, M.D., Director
Date: February 12, 2002
By /s/ Norman R. Hames
------------------------------------------
Norman R. Hames, Director
Date: February 12, 2002
39